Question

A stock is selling today for $50 per share. At the end of the year, it pays a dividend of $3 per share and sells for $58.

a. What is the total rate of return on the stock? (Enter your answer as a whole percent.)

b. What are the dividend yield and percentage capital gain? (Enter your answers as a whole percent.)

c. Now suppose the year-end stock price after the dividend is paid is $42. What are the dividend yield and percentage capital gain in this case? (Negative amounts should be indicated by a minus sign. Enter your answers as a whole percent.)

d. Is there any change in the dividend yield calculated in parts (b) and (c)?

Answer 1

a.

Total return on stock = [(P₁ – P₀) + D]/P₀

P₀ = Initial stock price = $ 50

P₁ = Ending stock price = $ 58

D = Dividends = $ 3

Substituting the values on the above formula, we get total return as:

Total return on stock = [($ 58 – $ 50) + $ 3]/$ 50

                                 = ($ 8 + $ 3)/$ 50 = $ 11/$ 50 = 0.22 or 22 %

b.

Dividend yield = D/P₀

                      =$ 3/$ 50 = 0.06 or 6 %

Capital gain = (P₁ – P₀)/P₀

                    = ($ 58 – $ 50)/$ 50 = $ 8/$ 50 = 0.16 or 16 %

c.

Dividend yield = D/P₀

                      =$ 3/$ 50 = 0.06 or 6 %

Capital gain = (P₁ – P₀)/P₀

                    = ($ 42 – $ 50)/$ 50 = - $ 8/$ 50 = - 0.16 or -16 %

d.

There is no change in dividend yield calculated in part (b) and (c) as the initial stock price and dividend are same.