Question

Suppose you bought 550 shares of stock at an initial price of $50 per share. The stock paid a dividend of $0.54 per share during the following year, and the share price at the end of the year was $45. a. Compute your total dollar return on this investment. (A negative value should be indicated by a minus sign.) b. What is the capital gains yield? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. What is the dividend yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) d. What is the total rate of return on the investment?

Answer 1

(a)-Total Dollar Return on this investment

Total Dollar Return on this investment = [Sale value of the shares + Dividend Received] – Purchase Value of the shares

= [(Number of shares x Selling price per share) + (Number of shares x Dividend per share)] – [Number of shares x Purchase price per share]

= [(550 x $45) + (550 x $0.54)] – [550 x $50]

= [$24,750 + $297] - $27,500

= $25,047 - $27,500

= -$2,453 (Negative)

“Total Dollar Return on this investment = -$2,453 (Negative)”

(b)-Capital gains yield

Capital Gain Yield = [(Ending Share Value – Initial Price) / Initial Price] x 100

= [($24,750 - $27,500) / $27,500] x 100

= [-$2,750 / $27,500] x 100

= -10.00% (Negative)

(c)-Dividend yield

Dividend yield = [Total Dividend Received / initial Price] x 100

= [$297 / $27,500] x 100

= 1.08%

(d)-Total rate of return on the investment

Total rate of return on the investment = Capital gain yield + Dividend Yield

= -10.00% + 1.08%

= -8.92% (Negative)

Or Total rate of return on the investment can also be calculated as follows

Total rate of return on the investment = [Total Dollar Return on this investment / Initial Price] x 100

= [-$2,453 / $27,500] x 100

= -8.92% (Negative)