1. You purchased 1,000 shares of stock for $43 per share exactly one year ago. D

Question

1. You purchased 1,000 shares of stock for $43 per share exactly one year ago. During the year, the stock paid a $.50 dividend per share and the current stock price is $27 per share. The inflation rate the last year was 2%. Answer the following (showing all work):

   (a) Calculate the actual return (also called percentage return) on your investment    over the last year.

   (b) Calculate (i) the dividend yield and (ii) the percentage capital gain.

   (c) Calculate the real rate of return on the stock.

Explanation / Answer

Part a)

Actual rate of return is the difference between the price at the year end and price at the beginning. It also includes the amount of dividend (if any) received during the year. The formula for calculating actual rate of return (%) is:

Actual Rate of Return (%) = (Closing Price - Opening Price + Dividend)/Opening Price*100

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Solution:

Using the values provided in the question, we get,

Actual Rate of Return (%) = (27 - 43 + .50)/43*100 = -36.05%

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Part B:

Dividend yield indicates the percentage of share value paid in the form of dividends to shareholders. The formula for calculating dividend yield is:

Dividend Yield = Annual Dividend/Initial Share Price*100

Capital Gain/Loss is the difference between the share value over a perio. The formula for calculating capital gain/loss (%) is:

Capital Gain/Loss (%) = (Closing Price - Opening Price)/Opening Price*100

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Solution:

Using the values provided in the question, we get,

Dividend Yield = .50/43*100 = 1.16%

_____

Capital Gain (%) = (27 - 43)/43*100 = -37.20%

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Part C:

Real rate of return on the stock is the calculated by adjusting the actual rate of return (%) for the inflation during the year. The formula for calculating real rate of return is:

Real Rate of Return = (1+Actual Rate of Return %)/(1+Inflation Rate %) - 1

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Solution:

Using the value calculated in part a) and information provided in the question, we get,

Real Rate of Return = (1-36.05%)/(1+2%) - 1 = -37.30%

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