Use the end-of-year stock price data in the popup window, LOADING... , to answer the following questions for the Harris and Pinwheel companies. a. Compute the annual rates of return for each time period and for both firms. b. Calculate both the arithmetic and the geometric mean rates of return for the entire three-year period using your annual rates of return from part a. (Note: you may assume that neither firm pays any dividends.) c. Compute a three-year rate of return spanning the entire period (i.e., using the ending price for period 1 and ending price for period 4). d. Since the rate of return calculated in part c is a three-year rate of return, convert it to an annual rate of return by using the following equation: 1+ Three-Year Rate of Return =1+ 3 e. How is the annual rate of return calculated in part d related to the geometric rate of return? When you are evaluating the performance of an investment that has been held for several years, what type of average rate of return (arithmetic or geometric) should you use? Why? Question content area bottom Part 1 a. Enter the annual rate of return for each year for Harris in the table below. (Round to two decimal places.) Time Value of Harris Stock Annual Rate of Return Value of Pinwheel Stock Annual Rate of Return 1 $ 12 $ 20 2 6 enter your response here % 32 3 10 enter your response here % 31 4 15 enter your response here % 24 Time Value of Harris Stock Annual Rate of Return Value of Pinwheel Stock Annual Rate of Return 1 $ 12 $ 20 2 6 −50.00 % 32 enter your response here % 3 10 66.67 % 31 enter your response here % 4 15 50.00 % 24 enter your response here %
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.
Question content area top
Part 1
(Solving a comprehensive problem) Use the end-of-year stock price data in the popup window,
LOADING...
, to answer the following questions for the Harris and Pinwheel companies.
a. Compute the annual
b. Calculate both the arithmetic and the geometric mean rates of return for the entire three-year period using your annual rates of return from part a. (Note: you may assume that neither firm pays any dividends.)
c. Compute a three-year rate of return spanning the entire period (i.e., using the ending price for period 1 and ending price for period 4).
d. Since the rate of return calculated in part c is a three-year rate of return, convert it to an annual rate of return by using the following equation:
1+
|
Three-Year |
|
Rate of Return |
=1+
|
|
|
|
3
e. How is the annual rate of return calculated in part d related to the geometric rate of return? When you are evaluating the performance of an investment that has been held for several years, what type of average rate of return (arithmetic or geometric) should you use? Why?
Question content area bottom
Part 1
a. Enter the annual rate of return for each year for Harris in the table below. (Round to two decimal places.)
|
|
|
Time |
Value of Harris Stock |
|
Annual Rate of Return |
|
Value of Pinwheel Stock |
|
Annual Rate of Return |
|
|
1 |
$
12 |
|
|
|
$
20 |
|
|
|
|
2 |
6 |
|
enter your response here |
% |
32 |
|
|
|
|
3 |
10 |
|
enter your response here |
% |
31 |
|
|
|
|
4 |
15 |
|
enter your response here |
% |
24 |
|
|
|
|
Time |
Value of Harris Stock |
|
Annual Rate of Return |
|
Value of Pinwheel Stock |
|
Annual Rate of Return |
|
|
1 |
$
12 |
|
|
|
$
20 |
|
|
|
|
2 |
6 |
|
−50.00 |
% |
32 |
|
enter your response here |
% |
|
3 |
10 |
|
66.67 |
% |
31 |
|
enter your response here |
% |
|
4 |
15 |
|
50.00 |
% |
24 |
|
enter your response here |
% |
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