Question

PDQ, Inc. stock is selling for $80 today. You are expecting a dividend of $3 next year and you plan to sell the stock for $95 one year from now. Calculate the one-year return on PDQ stock.

a-18.75%
b-3.75%
c-22.50%
d-9.50%

Answer 1

The one-year return on PDQ stock is calculated to be 22.5%, which is the profit from the dividend and the increase in stock price over the initial investment.

Step-by-step explanation:

To calculate the one-year return on PDQ stock, you start by determining the total expected proceeds from owning the stock for a year, which includes the dividend and the sale price of the stock. The dividend expected next year is $3, and the anticipated sale price is $95. The initial cost of the stock is $80 today, so the total gain is the sum of the dividend and the difference between the sale price and the purchase price: $3 + ($95 - $80) = $18. The return on the stock is the total gain divided by the initial investment: ($18 / $80) = 0.225 or 22.5%.