USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

-Refer to Exhibit 7.4. What are the expected returns for stocks X, Y, and Z for the next period based on the above prices and dividends? X Y Z
A) 4.8% 18.3% 16.9%
B) 10.7% 17.5% 14.4%
C) 11.2% 20.7% 16.9%
D) 12.3% 22.5% 22.3%
E) 13.1% 24.3% 18.2%

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 7.4. What are the expected returns for stocks X, Y, and Z for the next period based on the above prices and dividends? X Y Z
A) 4.8% 18.3% 16.9% 
B) 10.7% 17.5% 14.4% 
C) 11.2% 20.7% 16.9% 
D) 12.3% 22.5% 22.3% 
E) 13.1% 24.3% 18.2%

Quizplus · Accepted Answer

The expected return for a stock is calculated as the dividend yield plus the capital gains yield. The dividend yield is the dividend per share divided by the current stock price. The capital gains yield is the expected change in the stock price divided by the current stock price.For stock X, the dividend yield is 0.50/10.00 = 5.00%. The capital gains yield is (10.50 - 10.00)/10.00 = 5.00%. Therefore, the expected return for stock X is 5.00% + 5.00% = 10.00%.For stock Y, the dividend yield is 1.00/5.00 = 20.00%. The capital gains yield is (5.50 - 5.00)/5.00 = 10.00%. Therefore, the expected return for stock Y is 20.00% + 10.00% = 30.00%.For stock Z, the dividend yield is 1.00/6.00 = 16.67%. The capital gains yield is (6.50 - 6.00)/6.00 = 8.33%. Therefore, the expected return for stock Z is 16.67% + 8.33% = 25.00%.