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Chapter1213solutions

Chapter1213solutions - CHAPTER 12 SOME LESSONS FROM CAPITAL...

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CHAPTER 12 SOME LESSONS FROM CAPITAL MARKET HISTORY Solutions to Questions and Problems 1. The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial price. The return of this stock is: R = [($102 – 91) + 2.40] / $91 = .1473 or 14.73% 2. The dividend yield is the dividend divided by price at the beginning of the period price, so: Dividend yield = $2.40 / $91 = .0264 or 2.64% And the capital gains yield is the increase in price divided by the initial price, so: Capital gains yield = ($102 – 91) / $91 = .1209 or 12.09% 3. Using the equation for total return, we find: R = [($83 – 91) + 2.40] / $91 = –.0615 or –6.15% And the dividend yield and capital gains yield are: Dividend yield = $2.40 / $91 = .0264 or 2.64% Capital gains yield = ($83 – 91) / $91 = –.0879 or –8.79% Here’s a question for you: Can the dividend yield ever be negative? No, that would mean you were paying the company for the privilege of owning the stock. It has happened on bonds. 4. The total dollar return is the increase in price plus the coupon payment, so: Total dollar return = $1,070 – 1,040 + 70 = $100
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