1Cost of Capital Problem Set Solutions*1.The stock of Company A was trading at $40 on Dec 31, 2000 and reached $42 on January 31, 2001. If you bought the stock at that price and held it until Jan 31, 2001 what would be your 1-month return assuming no dividends were paid. What is the monthly return if $0.50 was received in dividends on January 31, 2001?
2.You bought a share of Company B for $33.50 exactly 1 year ago. Since then received $1.25 in cash dividends two months ago. Additionally, today the stock split 3 for 2. The price after the split is $28.00 per share. What is your holding period return? you How stock splits change the return calculations are described If there is no stock split, the return for any given month t is calculated as: 11tttttPPDividendrPIf there is a stock split: A stock split is when one existing share is replaced by more than one new share. The split ratiodetermines how many newshares the existing shareholder gets. An example would be a 3 for 2 split, which implies that if you were holding 2 shares, those would be replaced by 3 new shares. Thus, if the original *Some of these problems are based on problems and examples discussed by Ross Westerfield and Jordan (Alternate Ed.), Brealey and Myers (7th Ed.)