CFA Practice Question

CFA Practice Question

A stock is priced $25 at the beginning the year. The market's expected rate of return on the stock is 10%. It pays a dividend of $2 at the end of the year. To meet the market's expected rate of return, the price of the stock at the end of the year has to be:
A. $25
B. $25.5
C. $27.5
Explanation: The total value to the investor will be 10%, that is $2.50. This return is divided into dividend and capital gains. Dividend is $2, so capital gains must be $0.50.

User Contributed Comments 3

User Comment
chantal I prefer the following explanation:

(P1-P0(25$)+2$)/ P0(25$)= 10% expected return

P1= 25.5$
Clude Expected return= capital gain yield + div yield.
Div yield= 2/25= 0.08.
So capital gain = 10%-0.08=0.02

So stock price in 1 yr=25*(1+0.02)
moneyguy Thanks, both of you.
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