ARE143_CHAP_1_KEY - 1 Managerial Economics(ARE 143...

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1 Managerial Economics (ARE) 143 University of California, Davis Instructor: John H. Constantine KEY —Chapter 1 Problem 1 : Suppose you bought 100 shares of stock at an initial price of $73 per share. The stock paid a dividend of $0.88 per share during the following year, and the share price at the end of the year was $82. (a) Compute your dollar return on this investment. Does this answer change if you keep the stock instead of selling it? Explain. Total dollar return = 100($82 – 73 + 0.88) = $988.00 Whether you choose to sell the stock or not does not affect the gain or loss for the year, your stock is worth what it would bring if you sold it. Whether you choose to do so or not is irrelevant (ignoring commissions and taxes). (b) What is the capital gains yield? What is the dividend yield? What is the total rate of return on the investment? Capital gains yield = ($82 – 73)/$73 = 12.33% Dividend yield = $0.88/$73 = 1.21% Total rate of return = 12.33% + 1.21% = 13.53% (c) Now assume you bought 750 shares of the stock and the ending share price is $68.40 . Rework your answers to parts (a) and (b).
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This note was uploaded on 01/13/2012 for the course ARE 143 taught by Professor Brinkley,g during the Spring '08 term at UC Davis.

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ARE143_CHAP_1_KEY - 1 Managerial Economics(ARE 143...

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