Question

At the beginning of last year I bought 80 shares (share) of 4,000 € in a company whose shares are traded in the Union
European Union, during the past year the company distributed a profit of € 5 per share. At the end of the year I sold no
80 shares, 59 € per share.

1. Calculate the total return on the retention period, indicating the return that you obtained from
Change in price and return obtained from distributed profits.

2. The rate of return calculated in the first question is nominal. Assuming that the inflation rate during the past year was 4%, calculate the real return if the inflation rate was 8%.

Answer 1

2 1) 2) Total investment = €4000 No. of shares bought = 80 shares Initial share price = 4000/80 = €50 per share Nominal return = 20% Real interest rate = (1+nominal return)/(1+inflaion rate) -1 Total return =(Final share price - initial share price + dividend)/Initial share price Total return =(59 - 50 + 1)/ 50 Total return = 20.00% If inflation -4% Real interest rate = (1+nominal return)/(1+inflaion rate) -1 Real interest rate = (1+20%)/(1+4%)-1 Real interest rate = 15.38% Return from dividend = Dividend / Initial share price Return from dividend = 1/50 Return from dividend = 2.00% If inflation =8% Real interest rate = (1+nominal return)/(1+inflaion rate) -1 Real interest rate = (1+20%)/(1+8%)-1 Real interest rate = 11.11% Return from capital gain = (Final share price - initial share price) / Initial share price Return from capital gain = (59 - 50) / 50 Return from capital gain - 18.00%