chap010solutions

# chap010solutions - Solutions to Chapter 10 Introduction to...

• Notes
• 8

This preview shows pages 1–3. Sign up to view the full content.

Solutions to Chapter 10 Introduction to Risk, Return, and the Opportunity Cost of Capital 1. % 0 . 15 15 . 0 40 \$ 2 \$ ) 40 \$ 44 (\$ price share initial dividend gain capital return of Rate = = + - = + = Dividend yield = dividend/initial share price = \$2/\$40 = 0.05 = 5% Capital gains yield = capital gain/initial share price = \$4/\$40 = 0.10 = 10% 2. Dividend yield = \$2/\$40 = 0.05 = 5% The dividend yield is unaffected; it is based on the initial price, not the final price. Capital gain = \$36 – \$40 = - \$4 Capital gains yield = –\$4/\$40 = –0.10 = –10% 3. a. % 0 40 \$ 2 \$ ) 40 \$ 38 (\$ price share initial dividend gain capital return of Rate = + - = + = % 85 . 3 0385 . 0 1 04 . 0 1 0 1 1 rate inflation 1 return of rate nominal 1 return of rate Real - = - = - + + = - + + = b. % 5 05 . 0 40 \$ 2 \$ ) 40 \$ 40 (\$ return of Rate = = + - = % 96 . 0 0096 . 0 1 04 . 1 05 . 1 1 rate inflation 1 return of rate nominal 1 return of rate Real = = - = - + + = c. % 10 10 . 0 40 \$ 2 \$ ) 40 \$ 42 (\$ return of Rate = = + - = % 77 . 5 0577 . 0 1 04 . 1 10 . 1 1 rate inflation 1 return of rate nominal 1 return of rate Real = = - = - + + = 10-1

This preview has intentionally blurred sections. Sign up to view the full version.

4. 1 rate inflation 1 return of rate nominal 1 return of rate Real - + + = Costaguana: Real return % 33 . 8 0833 . 0 1 80 . 1 95 . 1 = = - = U.S.: Real return % 80 . 9 0980 . 0 1 02 . 1 12 . 1 = = - = The U.S. provides the higher real rate of return despite the lower nominal rate of return. Notice that the approximate relationship between real and nominal rates of return is valid only for low rates: real rate of return nominal rate of return – inflation rate This approximation incorrectly suggests that the Costaguanan real rate was higher than the U.S. real rate. 5. We use the following relationship: 1 rate inflation 1 return of rate nominal 1 return of rate Real - + + = Asset class Nominal rate of return Inflation rate Real rate of return Treasury bills 4.0% 3.0% 0.97% Treasury bonds 5.3% 3.0% 2.23% Common stocks 11.7% 3.0% 8.45% 6. The nominal interest rate cannot be negative. If it were, investors would choose to hold cash (which pays a rate of return equal to zero) rather than buy a Treasury bill providing a negative return. On the other hand, the real expected rate of return is negative if the inflation rate exceeds the nominal return.
This is the end of the preview. Sign up to access the rest of the document.
• Winter '07
• Tennyson

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern