Question

expected to pay a $1.00 dividend sve 2) (2 pts) Stock BB currently sells for $ rently sells tor $49 per share and is onths and sell for $53 in 9 months. What is the expected periodic return over the next 9 months BB? ? What is the expected nominal rate of return (Annual Percentage Rate) for Stock Expected Periodic Rate of Return = Expected Nominal Rate of Return (APR) =-2 · 96 3) (2 pts) Stock CC currently sells for $42 a share and is expected to pay $1.00 dividend one year from now and $1.80 dividend two years from now and $2.10 dividend three years from now. Stock CC is expected to sell for $69 per share in three years. What is the expected rate of return for Stock CC? Expected rate of return for Stock CC = 2-4 S

Answer 1

Let E(r) be the expected holding period return.

Let E(D₁) be the expected divided for the holding period.

Let P be the current stock price and E(P₁) be the stock price at the end of the holding period.

Hence, we have;

$E(r)=\frac{(E(D_{1})+(E(P_1)-P_0))}{P}=\frac{1+53-49}{49}=\frac{5}{49}=0.1020$

Hence, E(r) = 10.20%

Let E(R) be the Annual Percentage Return.

Hence, we have;

E(R) = E(r) * 12/Holding Period = 10.20%*12/9 = 13.60%

(Note: Annual Percentage Rate are annualized using simple rather than compounded return. APR and Effective Annual Rate are related by following formula;)

$APR = \frac{(1+EAR)^{T}-1}{T}$

2.

Using the previous formula we have;

$E(r)=\frac{(E(D_{1})+(E(D_{2})+(E(D_{3})+(E(P_1)-P_0))}{P}=\frac{1+1.8+2.1+69-42}{42}=\frac{31.9}{42}=0.7595$

Hemce stock CC will give 75.95% return in 3 years.

Here, E(D₁), E(D₂) and E(D₃) are expected dividend pay out in 1, 2 and 3 year.

Hence, APR, I.e. E(R) = 75.95%/36*12 = 25.32%