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%

A stock is selling today for $20 per share. At the end of the year, it pays a dividend of $2 per share and sells for $23.

A stock is selling today for $20 per share. At the end of the year, it pays a dividend of $2 per share and sells for $23.

a.	What is the total rate of return on the stock?

Rate of return

%

b.	What are the dividend yield and percentage capital gain?

Dividend yield	%
Capital gains yield	%

Explanation:

 a.

Rate of return =	capital gain + dividend	=	($23 − $20) + $2	= 0.25 = 25%
	initial share price		$20

b.

Dividend yield = dividend/initial share price = $2/$20 = 0.10 = 10%

Capital gains yield = capital gain/initial share price = $3/$20 = 0.15 = 15%

Suppose you know that a company’s stock currently sells for $66.60 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield.

Suppose you know that a company’s stock currently sells for $66.60 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield.

 

Required:

If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

 

Dividend per share

$

Explanation:

We know the stock has a required return of 11 percent, and the dividend and capital gains yield are equal, so:

 

Dividend yield = 1/2(0.11)

Dividend yield = 0.055 = Capital gains yield

 

Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times the dividend yield, so:

 

D1 = 0.055($66.60)

D1 = $3.66

 

This is the dividend next year. The question asks for the dividend this year. Using the relationship between the dividend this year and the dividend next year:

 

D1 = D0(1 + g)

 

We can solve for the dividend that was just paid:

 

$3.66 = D0(1 + 0.055)

D0 = $3.66 / 1.055

D0 = $3.47

You have set up your tax preparation firm as an incorporated business. You took $70,500 from the firm as your salary. The firm’s taxable income for the year (net of your salary) was $29,000. Assume you pay personal taxes as an unmarried taxpayer. Use the tax rates presented in Table 3-5 and Table 3-7.

You have set up your tax preparation firm as an incorporated business. You took $70,500 from the firm as your salary. The firm’s taxable income for the year (net of your salary) was $29,000. Assume you pay personal taxes as an unmarried taxpayer. Use the tax rates presented in Table 3-5 and Table 3-7.

a.	How much taxes must be paid to the federal government, including both your personal taxes and the firm’s taxes?

Total taxes

b.	By how much will you reduce the total tax bill by reducing your salary to $50,500, thereby leaving the firm with taxable income of $49,000?

Total taxes reduced

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