You purchase 100 shares of stock for $50 a share. The stock pays a $4 per share dividend at year-end. What is the rate of return on your investment for the end-of-year stock prices listed below? What is your real (inflation-adjusted) rate of return? Assume an inflation rate of 6%.

You purchase 100 shares of stock for $50 a share. The stock pays a $4 per share dividend at year-end. What is the rate of return on your investment for the end-of-year stock prices listed below? What is your real (inflation-adjusted) rate of return? Assume an inflation rate of 6%. (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your "Real Rate of Return" answers to 2 decimal places.)

	Rate of Return	Real Rate of Return
a. $46	%	%
b. $50	%	%
c. $55	%	%

Explanation:

a.

Rate of return =	capital gain + dividend	=	($46 − $50) + $4	= 0%
	initial share price		$50

Real rate of return =	1+ nominal rate of return	−1 =	1 + 0	−1 = −0.0566 = −5.66%
	1+ inflation rate		1 + 0.06

b.

Rate of return =	capital gain + dividend	=	($50 − $50) + $4	= 0.08 = 8%
	initial share price		$50

Real rate of return =	1+ nominal rate of return	−1 =	1.08	−1 = 0.0189 = 1.89%
	1+ inflation rate		1.06

  
c.

Rate of return =	capital gain + dividend	=	($55 − $50) + $4	= 0.18 = 18%
	initial share price		$50

Real rate of return =

1+ nominal rate of return

−1 =

1.18

−1 = 0.1132 = 11.32%