Chapter 12, Problem 12.1CTF

Chase Bank pays an annual dividend of $1.05 per share on its common stock. One year ago, this stock sold for $48 per share. Today, the stock is priced to sell at $31 per share. What is the capital gains yield?

Summary Introduction

To determine: The capital gains yield.

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.

Capital yield refers to the change in the value of investment stated in terms of percentage.

Answer to Problem 12.1CTF

The capital gains yield is (35.42 percent). The yield is negative because of the decrease in the value of the investment.

Explanation of Solution

Given information:

The stock price of Bank C one year ago was $48. The bank paid $1.05 per share as dividend for the year. The current price of the stock in the market is $31.

The formula to calculate the capital gains yield:

$\text{Capital gains yield}=\frac{P_{t+1}-P_t}{P_t}$

Where,

“P_t+1” refers to the price at the end of the year

“P_t” refers to the initial price of the share

Compute the capital gains yield:

$\begin{array}{c}\text{Capital gains yield}=\frac{P_{t+1}-P_t}{P_t}\\ =\frac{\$31-\$48}{\$48}\\ =\frac{\left(\$17\right)}{\$48}\\ =\left(0.3542\right)\text{ or }\left(35.42\text{ percent}\right)\end{array}$

Hence, the capital gains yield is (35.42 percent).