Chapter 10, Problem 10.1C

Summary Introduction

To determine: Percentage total return.

Introduction:

Total return refers to the total income from an investment. The total income includes the periodic incomes and the increase or decrease in the value of an asset. Percentage return refers to the returns stated as a percentage. It determines the returns per one dollar of investment or per $100 worth of investment.

Answer to Problem 10.1C

Percentage total return is 28.74%.

Explanation of Solution

Given information:

The initial price of stock is $119, dividend per share is $3.20 and ending share price is $150.

Formulae:

The formula to calculate the percentage total return:

$\text{Percentage total return}=\text{Dividend yield}+\text{Capital gain yield}$

The formula to calculate the dividend yield:

$\text{Dividend yield}=\frac{\text{Dividend per share}}{\text{Initial stock price}}$

The formula to calculate the capital gain yield:

$\text{Capital gain yield}=\frac{\left(\text{Stock price at the end}-\text{Initial stock price}\right)}{\text{Initial stock price}}$

Compute dividend yield:

Note: Dividend yield and capital gain yield is calculated to determine the Percentage of total return.

$\begin{array}{c}\text{Dividend yield}=\frac{\text{Dividend per share}}{\text{Initial stock price}}\\ =\frac{\$3.20}{\$119}\\ =0.0269\text{or}\text{2}\text{.69\%}\end{array}$

Hence, the dividend yield is 2.69%.

Compute capital gain yield:

$\begin{array}{c}\text{Capital gain yield}=\frac{\left(\text{Stock price at the end}-\text{Initial stock price}\right)}{\text{Initial stock price}}\\ =\frac{\$150-\$119}{\$119}\\ =\frac{\$31}{\$119}\\ =0.261or26.05\%\end{array}$

Hence, the dividend yield is 26.05%.

Compute the percentage total return:

$\begin{array}{c}\text{Percentage total return}=\text{Dividend yield}+\text{Capital gain yield}\\ =0.0269+0.2605\\ =0.2874\text{or}\text{28}\text{.74}\end{array}$

Hence, the percentage total return is 28.74%.