Shane purchased a stock this morning at a cost of $11 a share. He expects to receive an annual dividend of $.27 a share next year. What will the price of the stock have to be one year from today if Shane is to earn a 15 percent rate of return on this investment?
A) $12.38
B) $12.60
C) $12.88
D) $13.14
E) $14.28

Question

Quizplus · Accepted Answer

The correct answer is A.The price of the stock one year from today will have to be $12.38 if Shane is to earn a 15 percent rate of return on this investment. This is because the total return on the investment will be $1.38, which is the sum of the dividend of $.27 and the capital gain of $1.11. The capital gain is calculated as follows:Capital gain = (Price of stock one year from today - Cost of stock) / Cost of stockCapital gain = (x - 11) / 11Capital gain = 1.11The total return on the investment is then calculated as follows:Total return = Dividend + Capital gainTotal return = $.27 + 1.11Total return = $1.38The rate of return on the investment is then calculated as follows:Rate of return = Total return / Cost of stockRate of return = 1.38 / 11Rate of return = 15%

Shane Purchased a Stock This Morning at a Cost of $11