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# HW01 - rate of return =(22 – 28 0.70 28 =-0.19 rate of...

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Assignment 1 1. The stock of Dynamo Corporation went from \$25 to \$28 last year. The firm also paid 50 cents in dividends. Compute the rate of return. rate of return = [(ending value – beginning value) + income ] / beginning value rate of return = [(28 – 25) +0.50] / 25 = 0.14 rate of return = 0.14 * 100% = 14% 2. In the following year, the dividend was raised to 70 cents. However, a bear market developed toward the end of the year, and the stock price declined from \$28 to \$22. Compute the rate of return or (loss) to stockholders. rate of return = [(ending value – beginning value) + income ] / beginning value
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Unformatted text preview: rate of return = [(22 – 28) +0.70] / 28 = -0.19 rate of return = -0.19 * 100% = -19% 3. Assume the real rate of return in the economy is 2.5%, the expected rate of inflation is 4%, and the risk premium is 5.9%. Compute the risk-free rate and required rate of return. risk-free rate = (1 + real rate) (1 + expected rate of inflation) – 1 risk-free rate = (1+.025) (1 + .04) -1 = .066 risk-free rate = .066 * 100% = 6.6% required return = risk-free rate + risk premium required return = 6.6% + 5.9% = 12.5...
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