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Session+11_1_ - 1 CAPITALMARKETTHEORY

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CAPITAL MARKET THEORY Ross, Westerfield & Jaffe “ Corporate Finance” 7 th ed. Chapters 9 &10 1
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Returns Dollar Returns the sum of the cash received and the change in value of the asset, in dollars. Time 0 1 Initial investment Ending market value Dividends Percentage Returns: the sum of the cash received and the change in value of the asset divided by the original investment. 2
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Dollar Return = Dividend + Change in Market Value Returns yield gains capital yield dividend ue market val beginning ue market val in change dividend ue market val beginning return dollar return percentage 3
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Returns: Example Suppose you bought 100 shares of Wal Mart (WMT) one year ago today at $25. Over the last year, you received $20 in dividends (= 20 cents per share × 100 shares). At the end of the year, the stock sells for $30. What return did you earn? You invested $25 × 100 = $2,500. At the end of the year, you have stock worth $3,000 and cash dividends of $20. Your dollar gain was $520 = $20 + ($3,000 – $2,500). Your percentage gain for the year is Does it matter if you don’t sell at $30 but instead hold? $2,500 $520 =20.8% 4
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Holding Period Returns The holding period return is the return that an investor would get when holding an investment over a period of n years, when the return during year i is given as r i : 1 ) 1 ( ) 1 ( ) 1 ( return period holding 2 1 n r r r 5
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Holding Period Return: Example
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This note was uploaded on 04/09/2012 for the course FINN 321 taught by Professor Farahsaid during the Spring '12 term at Alvin CC.

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Session+11_1_ - 1 CAPITALMARKETTHEORY

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