16) Louis purchased $5,000 worth of stock three years ago and sold t today for $

Question

16) Louis purchased $5,000 worth of stock three years ago and sold t today for $8.,000 He received no dividends from this investment. Inflation averaged 1% during the three years he owned the stock. What was his annualized real rate of return on this investment? 17) The firm will pay an annual dividend this year of $3 per share. The current market price of the stock is $40.00 per share. The book value of this stock is $24.00 per share. The earnings per share for this firm is $5.75. What is the current dividend yield of this stock? 18) You purchased 100 shares of Quantex at $150 per share for a total investment of $15,000. After your purchase the stock had a 3 for 1 split. How many shares do you now own and how much is your original investment now worth? A) 100 shares and $150 dollars B) 300 shares and $15,000 dollars C) 100 shares and $45,000 dollars D) 300 shares and $45,000 dollars 19) ComChip is a computer chip manufacturer. Its stock is selling at $50 per share and earnings are $2 per share. What is the stock's P/E ratio? A) 50.00 B) 45.80 C) 25.00 D) 27.78 E) 22.50

Explanation / Answer

(16)

Purchase Price of Stock = $5000 and Sale Price = $8000

Nominal Rate of Return = R(n) = [(8000 - 5000) / 5000] x 100 = 60%

Annual Inflation Rate = i = 1%

Let annualized real return rate be R(r) and Stock Holding Period = t = 3 years

Therefore, by Fisher Effect

[(1+R(n)) / (1+i)^{t}] = 1+ R(r) where all variable values are all mentioned above. Inputing variable values and solving the Fisher Effect equation we get

R(r) = 0.5529 OR 55.29%

NOTE: Please raise separate question for each of the following questions.

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