A stock selling for $20.00 today and expected to have an income (dividend)yield of 3% and a capital gain yield of 5% in one year will increase in price to sell at:
A)$21.60
B)$20.60
C)$21.00
D)$20.40

Question

Quizplus · Accepted Answer

The expected total return on the stock is the sum of the expected income (dividend) yield and the expected capital gain yield. In this case, the total expected return is 3% + 5% = 8%.

To calculate the expected price of the stock at the end of one year, we can use the following formula:

Expected Price = Current Price x (1 + Total Expected Return)

Plugging in the numbers:

Expected Price = $20.00 x (1 + 0.08) = $20.00 x 1.08 = $21.60

Therefore, the best choice is C, which is the closest option to the expected price of $21.60.

A Stock Selling for $20