Question

A stock is selling for $20.00 (Po). The projected selling price one year from now (P1) is $22.50 and the projected dividend payment one year from now (D1) is $1.00. What is the expected return on an investment in the stock made today?

Answer 1

The expected return on the investment in the stock made today, considering the given stock prices and dividend, is 17.5%.

Step-by-step explanation:

The expected return on an investment in the stock made today can be calculated using the formula for the total return, which includes capital gains (or losses) plus any dividends received. So, using the initial stock price (Po), projected selling price one year from now (P1), and projected dividend payment one year from now (D1), we can calculate the expected return as follows:

Expected Return = ((P1 – Po) + D1) / Po

Plugging in the values from the question:

Expected Return = (($22.50 – $20.00) + $1.00) / $20.00

Expected Return = ($2.50 + $1.00) / $20.00

Expected Return = $3.50 / $20.00

Expected Return = 0.175 or 17.5%

Therefore, the expected return on the investment is 17.5%.