You purchase 100 shares of stock for $40 a share

Finance Nov 11, 2020

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) $44

b) What is your real (inflation-adjusted) rate of return if the inflation rate is 3%? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

Expert Solution

a) Rate of return:

(i) 0%
(ii) 5%
(iii) 15%

b) Real rate of return:

(i) -2.91%
(ii) 1.94%
(iii) 11.65%

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