Chapter 10: Risk and Return: Lessons from Market History
Capital gains = $56 – $52 = $4 per share; Total capital gains is $2000 ( $4 x 500)
Total dollar returns
= Dividends + Capital Gains
= $1,000 + ($4 x 500) = $3,000
On a per share basis, this calculation is $2 + $4 = $6 per share
On a per share basis, $6/$52 = 0.1153 or 11.53%
On a total dollar basis, $3,000/(500*$52) = 0.1153
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
(Note that for tax purposes, you must sell the stock.)
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 ($62.50 = $12,500 / 200).
Because the price of the stock increased from $62.50 per
share to $69.75 per share, he earned a capital gain of $7.25 per share (=$69.75 – $62.50).
) (Number of Shares)
= ($69.75 – $62.50) (200)
Seth’s capital gain is
The total dollar return is equal to the dividend income plus the capital gain.
He received $750 in
dividend income, as stated in the problem, and received $1,450 in capital gains, as found in part
Total Dollar Gain = Dividend income + Capital gain
= $750 + $1,450
Seth’s total dollar return is $2,200
The percentage return is the total dollar gain on the investment as of the end of year 1 divided by
the initial investment of $12,500.
)] / P
+ $1,450] / $12,500
The percentage return is 17.60%.
The dividend yield is equal to the dividend payment divided by the purchase price of the stock.
Dividend Yield = Div
Answers to End–of–Chapter Problems