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Returns

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Understanding Returns

6-1 You purchase 1,000 shares of Spears Grinders, Inc. stock for $45 per share. A year later, the stock pays a dividend of $1.25 per share, and it sells for $49.

a. Calculate your total dollar return.
b. Calculate your total percentage return.
c. Do the answers to parts (a) and (b) depend on whether you sell the stock after one year or continue to hold it?

6-2 A financial advisor claims that a particular stock earned a total return of 10 percent last year. During the year the stock price rose from $30-$32.50. What dividend did the stock pay?

Expected Returns

7-1

a. Suppose that over the long run, the risk-premium on stocks relative to Treasury bills has been 7.6 percent in the United States. Suppose also that the current Treasury bill yield is 1.5%, but the historical average return on Treasury bills is 4.1%. Estimate the expected return on stocks and explain how and why you arrived at your answer.

b. Suppose that over the long run, the risk-premium on stocks relative to Treasury bonds has been 6.5%. The current Treasury bond yield is 4.5%, but the historical return on T-bonds is 5.2%. Estimate the expecte return on stocks and explain how and why you arrived at your answer.

c. Compare your answers above and explain any differences.

7-3 Use the information below to estimate the expected return on the stock of W.M. Hung Corporation.

Long-run average stock return = 10%
Long-run average T-bill return = 4%
Current T-bill return = 2%

Attachments

Solution Preview

Please see the attached file.

Understanding Returns

6-1 You purchase 1,000 shares of Spears Grinders, Inc. stock for $45 per share. A year later, the stock pays a dividend of $1.25 per share, and it sells for $49.

a. Calculate your total dollar return.

Total dollar return is the total capital gains and the dividend
Capital gain = (49-45) X 1,000 = 4,000
Dividend = 1.25X1,000=1,250
Total dollar return = 4,000+1,250 = $5,250

b. Calculate your total percentage return.

The percentage return is calculated on the initial investment
Percentage return = Dollar return/initial investment
= 5,250/(45X1,000) = 11.67%

c. Do the answers to parts (a) and (b) depend on whether you sell the stock after one year or continue to hold ...

Solution Summary

The solution explains various questions relating to calculation of returns

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