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. |