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Unformatted text preview: Chapter 10: Capital Market Theory: An Overview 10.1 a. Capital gains = $38 - $37 = $1 per share; Total capital gains is $500 ( $1 x 500) b. Total dollar returns = Dividends + Capital Gains = $1,000 + ($1*500) = $1,500 On a per share basis, this calculation is $2 + $1 = $3 per share c. On a per share basis, $3/$37 = 0.08108 = 8.108% On a total dollar basis, $1,500/(500*$37) = 0.08108 = 8.108% d. No, you do not need to sell the shares to include the capital gains in the computation of the returns. The capital gain is included whether or not you realize the gain. Since you could realize the gain if you choose, you should include it. (Note that for tax purposes, you must sell the stock.) 10.2 a. The capital gain is the appreciation of the stock price. Find the amount that Seth paid for the stock one year ago by dividing his total investment by the number of shares he purchased ($52.00 = $10,400 / 200). Because the price of the stock increased from $52.00 per share to $54.25 per share, he earned a capital gain of $2.25 per share (=$54.25 - $52.00). Capital Gain = (P t+1 – P t ) (Number of Shares) = ($54.25 - $52.00) (200) = $450 Seth’s capital gain is $450. b. The total dollar return is equal to the dividend income plus the capital gain. He received $600 in dividend income, as stated in the problem, and received $450 in capital gains, as found in part ( a ). Total Dollar Gain = Dividend income + Capital gain = $600 + $450 = $1,050 Seth’s total dollar return is $1,050. c. The percentage return is the total dollar gain on the investment as of the end of year 1 divided by the initial investment of $10,400. R t+1 = [Div t+1 + (P t+1 – P t )] / P t = [$600 + $450] / $10,400 = 0.1010 The percentage return is 10.10%. b. The dividend yield is equal to the dividend payment divided by the purchase price of the stock. Dividend Yield = Div 1 / P t = $600 / $10,400 = 0.0577 Answers to End-of-Chapter Problems B-121 The stock’s dividend yield is 5.77%. 10.3Apply the percentage return formula. Note that the stock price declined during the period. Since the stock price decline was greater than the dividend, your return was negative. R t+1 = [Div t+1 + (P t+1 – P t )] / P t = [$2.40 + ($31 - $42)] / $42 = -0.2048 The percentage return is –20.48%. 10.4 Apply the holding period return formula. The expected holding period return is equal to the total dollar return on the stock divided by the initial investment. R t+2 = [P t+2 – P t ] / P t = [$54.75 - $52] / $52 = 0.0529 The expected holding period return is 5.29%....
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- Fall '08