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

Question

Quizplus · Accepted Answer

To calculate the rate of return, we need to take into account both the dividend income and the capital gain. The dividend income on one share of ABC equity is €1. If Fred wants to earn a 10% rate of return, he would need a capital gain of 10% on the €20 purchase price, which is €2. Therefore, the total price of the ABC shares needs to be €20 + €1 + €2 = €23. This is a 15% increase from the original price of €20. However, since the price has already increased by €1 due to the dividend income, the remaining increase needed is only  €2, which is a 5% increase from the original price. Therefore, the correct answer is C) increase by 5%.

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