Suppose that the price of a stock is $50 at the beginning of a year and $53 at the end of the year, and it pays a dividend of $2 during the year. Calculate the stock’s current yield, capital-gains yield, and the return. Show your work for three separate calculations.
To calculate the stock's current yield, capital-gains yield, and return, we need to use the following formulas:
1. Current Yield = Dividend / Price
2. Capital-Gains Yield = (Ending Price - Beginning Price) / Beginning Price
3. Return = Current Yield + Capital-Gains Yield
Now let's work through each calculation step by step:
1. Current Yield:
To calculate the current yield, we need to divide the dividend by the price.
Current Yield = $2 / $50 = 0.04 or 4%
So, the current yield of the stock is 4%.
2. Capital-Gains Yield:
The capital-gains yield represents the percentage change in the stock's price over a given period.
Capital-Gains Yield = ($53 - $50) / $50 = $3 / $50 = 0.06 or 6%
Therefore, the capital-gains yield of the stock is 6%.
3. Return:
To calculate the return, we need to add the current yield and the capital-gains yield.
Return = 4% + 6% = 10%
Hence, the return on the stock is 10%.
In summary:
- The current yield is 4%.
- The capital-gains yield is 6%.
- The overall return is 10%.