Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return.

Question

Quizplus · Accepted Answer

To calculate the rate of return, we need to consider both the dividend payment and any capital gains or losses. In this case, the dividend payment is $1 per share, which represents a 5% yield based on the original purchase price of $20 per share. In order to achieve a total rate of return of 10%, the stock price needs to increase by an additional 5% (i.e. from $20 to $21) to bring the total rate of return to 10% (5% dividend yield + 5% capital gain). Therefore, the price of ABC stock needs to increase by 5% to achieve Fred's desired rate of return.

Fred Flintlock Wants to Earn a Total of 10% on His