5 Problem 14.8 Calculating Return on Investment [L0143] Two years ago, you purch
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Question
5 Problem 14.8 Calculating Return on Investment [L0143] Two years ago, you purchased 100 shares of Coca-Cola Company. Your purchase price was $56 a share, plus a total commission of $37 to purchase the stock. During the last two years, you have received the following dividend amounts: $1.25 per share for the first year and $1.34 per share the second year. Also, assume that at the end of two years, you sold your Coca-Cola stock for $63 a share minus a total commission of $42 to sell the stock. 10 points (a) Calculate the dividend yield for your Coca Cola stock at the time you purchased it. (Enter your answer as a percent rounded to 2 decimal places.) Hint Dividend yield at purchase Ask Print (b) Calculate the dividend yield for your Coca-Cola stock at the time you sold it. (Enter your answer as a percent rounded to 2 decimal places.) References Dividend yield at sale (c) Calculate the total return for your Coca-Cola investment when you sold the stock at the end of two years. (Do not round intermediate calculations. Round your final answer to the nearest whole number.) Total return (d) Calculate the annualized holding period yield for your Coca-Cola investment at the end of the two-year period. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Annualized holding period yieldExplanation / Answer
Return on Investment :- Return on Investment (ROI) is the benefit to an investor resulting from an investment of some resource . A high ROI means the investments gains compare favorably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments. In economic terms, it is one way of relating profits to capital Invested.
Return on Investment (ROI) = Net Income
Investment
Dividend yield :- Dividend yield is the relation between a stock's annual dividend payout and its current stock price. The dividend yield is calculated using the annual yield (every regular payout paid that year). It is not calculated by using quarterly, semi annually or monthly payouts.
Dividend yield = Annual Dividend
Current Stock Price
Holding period :- Holding period return (HPR) is the rate of return on an asset or portfolio over the whole period during which it was held. It is one of the simplest and most important measures of Investment performance.
HPR = (End Value - Initial Value)
Initial Value
where the End value includes income, such as dividends earned on the Investment.
Annualized HPR = [ (End Value - Initial Value) + 1 ] ^ ( 1/ years) - 1
Initial Value
For the above information provided, the following is the situation :-
Number of Shares purchased = 100
Purchase price per share = $ 56
Commission paid for the = $ 37 Purchase
Total Purchase Price (Investment) = $ 56 *100 + $ 37 = $ 5,637
Dividend for the 1st year = $ 1.25
Total Dividend of 1st year on 100 shares = $1.25*100 = $ 125
Dividend for the 2nd year = $ 1.34
Total Dividend of 2nd year on 100 shares = $1.34*100 = $ 134
Selling price of a share = $ 63
Commission paid on sale = $ 42
Total Sales price = $ 63*100 - $ 42 = $ 6,258
a) As per the given information, dividend yield cannot be calculated at the time of purchase as the dividend is the amount received on the amount of investment. Initial Investment has been made. This implies, dividend is zero.
Dividend yield = Annual Dividend = Dividend at the time of Purchase = 0 = 0.00
Current Stock Price Current Stock Price 5,637
b) Dividend yield at the time of sale implies at the end of the sale year which implies at the end of Second year.
Dividend yield = Annual Dividend = 134 = 0.02
Current Stock Price 5,637
c) Total Return at the time of sale, end of two years.
Return on Investment (ROI) = Net Income = Total Sales + Dividend of 2 years - Cost price
Investment Investment
= $ 6,258 + $ 125 + $134 - $ 5,637 = $ 880 = 0.16
5,637 5,637
d) For Annualized Holding period :-
Annualized HPR = [ (End Value - Initial Value) + 1 ] ^ ( 1/ years) - 1
Initial Value
= [ $ 6,258 + $ 125 + $ 134 - $ 5,637 +1 ] ^ ( 1/ 2) - 1 5,637
= [ 880 +1 ] ^ ( 1/ 2) - 1 = $ 1.08 -1 = 0.08 5,637
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