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You purchase 130 shares of stock for $53 a share
You purchase 130 shares of stock for $53 a share. The stock pays a $3 per share dividend at year-end. What is the rate of return on your investment for these end-of-year stock prices? What is your real (inflation-adjusted) rate of return? Assume an inflation rate of 4%. (Round your answers to 2 decimal places. Use the minus sign for negative numbers if it is necessary.)
a. ?nd-of-year stock price = $49
Rate of return % ?
Real rate % ?
b. ?nd-of-year stock price = $53
Rate of return % ?
Real rate % ?
Expert Solution
Rate of return is computed as shown below:
= (Year end price - purchase price + dividend) / Purchase price
Real rate is computed as follows:
= [ (1 + Nominal rate) / (1 + inflation rate) ] - 1
a. Rate of return is computed as follows:
= ($ 49 - $ 53 + $ 3) / $ 53
= - 1.886792453% or - 1.89%
Real rate is computed as follows:
= [ (1 - 1.886792453%) / (1 + 4%) ] - 1
= - 5.66%
b. Rate of return is computed as follows:
= ($ 53 - $ 53 + 3) / $ 53
= 5.660377358% or 5.66%
Real rate is computed as follows:
= [ (1 + 5.660377358%) / (1 + 4%) ] - 1
= 1.60%
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