Compute the real rates of return for the following situations assuming that the inflation rate is 2 percent. Compute the real rates of return if the rate of inflation was 9 percent. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to one decimal places. a. On February 1, you bought 90 shares of stock in the Francesca Corporation for $30 a share and a year later you sold it for $33 a share. During the year, you received a cash dividend of $1.70 a share. Real rate of return at 2%: % Real rate of return at 9%: % b. On August 15, you purchased 100 shares of stock in the Cara Cotton Company at $41 a share and a year later you sold it for $35 a share. During the year, you received dividends of $3.00 a share. Real rate of return at 2%: % Real rate of return at 9%: c. At the beginning of last year, you invested $4,950 in 90 shares of the Chang Corporation. During the year, Chang paid dividends of $3.00 per share. At the end of the year, you sold the 90 shares for $64 a share. Real rate of return at 2%: % Real rate of return at 9%: % %
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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