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Expected and Actual Rates of Return on Stock

Expected and Required Returns, Equation 9.2 (page 399) k=D1 + (P1 - P0)/P0

The Duncan Company's stock is currently selling for $ 15. People generally expect its price to rise to $ 18 by the end of next year. They also expect that it will pay a dividend of $. 50 per share during the year. (Hint: Apply Equation 9.2 page 399).

a. What is the expected return on an investment in Duncan's stock?

b. Recalculate the expected return if next year's price is forecast to be only $ 17 and the dividend $. 25.

c. Calculate the actual return on Duncan if at the end of the year the price turns out to be $ 13 and the dividend actually paid was just $. 10.

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Solution Preview

The expected rate of return on stock equals its dividend yield plus its capital gains yield. The formulas are:

Expected dividend yield = Expected dividends during ...

Solution Summary

This solution discusses the components of the expected or actual rate of return on a stock, how to compute each, and how to compute the total rate of return on a stock. It then illustrates how to compute the total rate of return on stock.