Chapter 9: Capital Market Theory: An Overview
9.1
a.
The capital gain is the appreciation of the stock price.
Because the stock price
increased from $37 per share to $38 per share, you earned a capital gain of $1 per share
(=$38  $37).
Capital Gain
= (P
t+1
– P
t
) (Number of Shares)
= ($38  $37) (500)
=
$500
You earned $500 in capital gains.
b.
The total dollar return is equal to the dividend income plus the capital gain.
You received
$1,000 in dividend income, as stated in the problem, and received $500 in capital gains,
as found in part (
a
).
Total Dollar Gain
= Dividend income + Capital gain
= $1,000 + $500
=
$1,500
Your total dollar gain is $1,500.
c.
The percentage return is the total dollar gain on the investment as of the end of year 1
divided by the $18,500 initial investment (=$37
×
500).
R
t+1
= [Div
t+1
+ (P
t+1
– P
t
)] / P
t
= [$1,000 + $500] / $18,500
=
0.0811
The percentage return on the investment is 8.11%.
d.
No.
You do not need to sell the shares to include the capital gains in the computation of
your return.
Since you could realize the gain if you choose, you should include it in your
analysis.
9.2
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.
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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%.
e.
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
The stock’s dividend yield is 5.77%.
9.3
Apply 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%.
9.4
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
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 Summer '06
 TimothyDreyer
 Finance, Standard Deviation, Variance

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