Question

The price of a stock at the end of each of the past three years has been $14, $12, and $11 with $11 being the latest price. The stock pays an annual dividend of $1 per share. What is the average annual capital gain for the past two years? The average annual total return?

Answer 1

The average annual capital gain for the past two years is -0.114 (-11.4%).

The average annual total return is -0.043 (-4.3%)

Step-by-step explanation:

We can calculate the average annual capital gain as:

`P_2=P_0(1+g)^2\\\\g=√(P_2/P_0)-1\\\\g=√(11/14)-1=0.886-1\\\\g=-0.114`

As the stocks pays an annual dividend of $1, the dividend return can be calculated as:

`d=div/P_0=1/14=0.071`

The average annual total return can be calculated as the addition of both the annual capital gain and the dividend return.

`i=g+d=-0.114+0.071=-0.043`