You purchase 100 shares of stock for $40 a share. The stock pays a $2 per share

Question:

You purchase 100 shares of stock for $40 a share. The stock pays a $2 per share dividend at year-end.

a. What is the rate of return on your investment if the end-of-year stock price is

(i) $38;

(ii) $40;

(iii) $42?

b. What is your real (inflation-adjusted) rate of return if the inflation rate is 4%?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...