Chapter 14, Problem 9FPP

Summary Introduction

(a).

To calculate:

Dividend yield at the time of purchase of share.

Introduction: The Dividend Yield is the annual dividend amount generated by an investment divided by the investment’s current price per share.

Answer to Problem 9FPP

Solution:

Dividend yield at the time of purchase is 2.84%.

Explanation of Solution

Given,

Purchase price per share is $33

Commission paid on purchase $29

Dividend per share received in 1^st year $0.94

Dividend per share received in 2^nd year $1.12

Selling price per share is $40

Commission paid on sale $34

Formula to calculate dividend yield is given below:

$\text{Dividend}\text{yield}=\frac{\text{Annual}\text{dividend}\text{amount}}{\text{Price}\text{per}\text{share}}$

Substitute $33 for Price per share and $0.94 for annual dividend amount.

$\begin{array}{c}\text{Dividend}\text{yield}=\frac{\$0.94}{\$33}\\ =0.0284\\ =2.84\%\end{array}$

Hence, dividend yield at the time of purchase of share is 2.84%.

Summary Introduction

(b).

To calculate:

Dividend yield at the time of sale of share.

Introduction: The Dividend Yield is the annual dividend amount generated by an investment divided by the investment’s current price per share.

Answer to Problem 9FPP

Solution:

Dividend yield at the time of sale of share is 2.8%.

Explanation of Solution

Given,

Purchase price per share is $33

Commission paid on purchase $29

Dividend per share received in 1^st year $0.94

Dividend per share received in 2^nd year $1.12

Selling price per share is $40

Commission paid on sale $34

Formula to calculate dividend yield is given below:

$\text{Dividend}\text{yield}=\frac{\text{Annual}\text{dividend}\text{amount}}{\text{Price}\text{per}\text{share}}$

Substitute $40 for Price per share and $1.12 for annual dividend amount.

$\begin{array}{c}\text{Dividend}\text{yield}=\frac{\$1.12}{\$40}\\ =0.028\\ =2.8\%\end{array}$

Hence, dividend yield at the time of sale of share is 2.8%.

Summary Introduction

(c).

To calculate:

Total return from the investment at the time of sale.

Introduction: Total return is the amount which an investor receives over the amount he invests. It may include dividend or capital gain or both.

Answer to Problem 9FPP

Solution:

The total return would be $843.

Explanation of Solution

Given,

Number of shares 100

Purchase price per share is $33

Commission paid on purchase $29

Dividend per share received in 1^st year $0.94

Dividend per share received in 2^nd year $1.12

Selling price per share is $40

Commission paid on sale $34

Formula to calculate total purchase price is given below:

$\text{Total}\text{purchase}\text{price}=\left(\begin{array}{l}\text{Purchase}\text{Price}\text{per}\text{share}\\ \times \text{number}\text{of}\text{share}\end{array}\right)+\text{commission}\text{paid}$

Substitute, $33 for purchase price per share, 100 for number of share and $29 for commission paid in the above formula.

$\begin{array}{c}\text{Total}\text{purchase}\text{price}=\left(\$33\times 100\right)+\$29\\ =\$3,300+\$29\\ =\$3,329\end{array}$

Hence, total purchase price is $3,329.

Formula to calculate total selling price is given below:

$\text{Total}\text{selling}\text{price}=\left(\begin{array}{l}\text{Selling}\text{Price}\text{per}\text{share}\\ \times \text{Number}\text{of}\text{shares}\end{array}\right)-\text{commission}\text{paid}$

Substitute, $40 for selling price per share, 100 for number of share and $34 for commission paid in the above formula.

$\begin{array}{c}\text{Total}\text{selling}\text{price}=\left(\$40\times 100\right)-\$34\\ =\$4,000-\$34\\ =\$3,966\end{array}$

Hence, total selling price is $3,966.

Formula to calculate capital gain is given below:

$\text{Capital}\text{gain}=\text{Total}\text{Selling}\text{price}-\text{Total}\text{purchase}\text{price}$

Substitute $3,966 for total selling price and $3,329 for total purchase price.

$\begin{array}{c}\text{Capital}\text{gain}=\$3,966-\$3,329\\ =\$637\end{array}$

Hence, capital gain is $637.

Formula to calculate Total dividend received is given below:

$\text{Total}\text{dividend}\text{received=}\left(\begin{array}{l}\left(\begin{array}{l}\text{dividend}\text{per}\text{share}\text{received}\text{in}1\text{st}\text{year}\\ \times \text{Number}\text{of}\text{share}\end{array}\right)\\ +\left(\begin{array}{l}\text{dividend}\text{per}\text{share}\text{received}\text{in}2\text{nd}\text{year}\\ \times \text{Number}\text{of}\text{share}\end{array}\right)\end{array}\right)$

Substitute $0.94 for 1st year dividend and $1.12 for 2nd year dividend and 100 for number of share.

$\begin{array}{c}\text{Total}\text{dividend}\text{received}=\left(\left(\$0.94\times 100\right)+\left(\$1.12\times 100\right)\right)\\ =\left(\$94+\$112\right)\\ =\$206\end{array}$

Hence total dividend is $206.

Formula to calculate Total return is given below:

$\text{Total}\text{return}=\text{Capital}\text{Gain}+\text{Dividend}\text{received}$

Substitute $637 for capital gain and $206 for dividend received.

$\begin{array}{c}\text{Total}\text{return}=\$637+\$206\\ =\$843\end{array}$

Hence, total return would be $843.

Summary Introduction

(d).

To calculate:

Holding period yield at the end of two years

Introduction: A yield calculation that takes into account the total return, the original investment and the time investment is held.

Answer to Problem 9FPP

Solution:

Annualized holding period yield is 12.66%.

Explanation of Solution

Given,

Purchase price per share is $33

Commission paid on purchase $29

Dividend per share received in 1^st year $0.94

Dividend per share received in 2nd year $1.12

Selling price per share is $40

Commission paid on sale $34

Formula to calculate holding period yield is given below:

$\text{Annualized}\text{holding}\text{period}\text{yield}=\frac{\text{Total}\text{return}}{\text{Original}\text{investment}}\times \frac{1}{\text{Number}\text{of}\text{year}}$

Substitute $843 for total return, $3,329 for original investment and 2 for number of years.

$\begin{array}{c}\text{Annualized}\text{holding}\text{period}\text{yield}=\frac{\$843}{\$3,329}\times \frac{1}{2}\\ =0.1266\\ =12.66\%\end{array}$

Hence, Annualized holding period yield is 12.66%.