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# Multiple choice-Rate of Return, Price of Stock

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I need help figuring out what formulas to use so that I can understand how to compute the rate of return on the following questions. Please help with these multiple choice questions.

What is the rate of return for an investor who pays \$1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for \$1,037.19?
A) 5.00%
B) 5.33%
C) 6.46%
D) 7.00%

What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of \$2.50 which will be paid tomorrow?
A) \$27.78
B) \$30.28
C) \$31.10
D) \$31.39

What is the required return for a stock that has a 5% constant growth rate, a price of \$25, an expected dividend of \$2, and a P/E ratio of 10?
A) 5%
B) 10%
C) 13%
D) 22%

#### Solution Preview

What is the rate of return for an investor who pays \$1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for \$1,037.19?
A) 5.00%
B) 5.33%
C) 6.46%
D) 7.00%

Coupon= \$70
Purchase price= \$1,054.47
Sale price= \$1,037.19
Capital gain (loss)= (\$17.28) =1037.19-1054.47

Coupon + Capital gain (loss)= \$52.72 =70-17.28

Rate of return= 5.00% =52.72 / ...

#### Solution Summary

Answers and Explanations to Multiple choice questions on Rate of Return, Price of Stock, Required return for a stock

\$2.19