You purchase 100 shares of stock for 60 a share The stock pa

You purchase 100 shares of stock for $60 a share. The stock pays a $3 per share dividend at year-end. a. What is the rate of return on your investment if the end-of-year stock price is (i) $57; (ii) $60; (iii) $66? (Leave no cells blank - be certain to enter \"0\" wherever required. Enter your answers as a whole percent.) Stock price Rate of return $57 % $60 % $66 % b. What is your real (inflation-adjusted) rate of return if the inflation rate is 4%? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.) Stock price Real rate of return $57 % $60 % $66 %

Solution

Price at Beginning

$ 60

No. of Shares

100

Dividend

$ 3

(i)

Return if, Year end price

$ 57

Return

($ 57 - $ 60)+ $ 3

$ 60

Return = 0

(ii)

Return if, Year end price

$ 60

Return

($ 60 - $ 60)+ $ 3

$ 60

Return = 5 %

(iii)

Return if, Year end price

$ 66

Return

($ 66 - $ 60)+ $ 3

$ 60

Return = 15 %

If inflation rate is 4 % , the price at year end gets incresed by 4 %

(i)

Return if, Year end price

$ 57

Return

($ 57*1.04 - $ 60)+ $ 3

$ 60

Return = 3.80 %

(ii)

Return if, Year end price

$ 60

Return

($ 60*1.04 - $ 60)+ $ 3

$ 60

Return = 9 %

(iii)

Return if, Year end price

$ 66

Return

($ 66*1.04 - $ 60)+ $ 3

$ 60

Return = 19.40 %