Question 12.1: Calculating Returns Suppose you bought some stock at the beg...
Calculating Returns
Suppose you bought some stock at the beginning of the year for $25 per share. At the end of the year, the price is $35 per share. During the year, you got a $2 dividend per share. This is the situation illustrated in Figure 12.3. What is the dividend yield? The capital gains yield? The percentage return? If your total investment was $1,000, how much do you have at the end of the year?
Your $2 dividend per share works out to a dividend yield of:
Dividend yield ={D_{t+1}}/{P_{t}}
={\$ 2}/{25}=.08=8\%
The per-share capital gain is $10, so the capital gains yield is:
Capital gains yield ={(P_{t+1}-P_{t})}/{P_{t}}
={(\$ 35-25)}/{25}
={\$10}/{25}
=40\%
The total percentage return is thus 48 percent.
If you had invested $1,000, you would have $1,480 at the end of the year, representing a 48 percent increase. To check this, note that your $1,000 would have bought you $1,000/25 = 40 shares. Your 40 shares would then have paid you a total of 40 × $2 = $80 in cash dividends. Your $10 per share gain would give you a total capital gain of $10 × 40 = $400. Add these together, and you get the $480 increase.