You purchase 100 shares of stock for $40 a share. The stock pays a $2 per share dividend at year-end. What is the rate of return on your investment for these end-of-year stock prices? What is your real (inflation-adjusted) rated of return? Assume an inflation rate of 4 percent.

a. $38
b. $40
c. $42

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To calculate the rate of return on your investment, you need to consider both the dividend received and any change in the stock price. Here are the steps to find the rate of return:

1. Calculate the total dividend received: Since you purchased 100 shares and each share pays a $2 dividend, the total dividend received is: 100 shares * $2 per share = $200.

2. Calculate the change in the stock price: The question does not provide information on the end-of-year stock price, so we cannot directly calculate the rate of return based on the given answer choices.

Given the answer choices of $38, $40, and $42, we can assume they represent the end-of-year stock prices. Let's calculate the rate of return for each option:

a. End-of-year stock price = $38:
Total value of investment = 100 shares * $38 per share = $3,800.
Dividend received = $200 (calculated in step 1).
Total return = $3,800 + $200 = $4,000.
Rate of return = (Total return - Initial investment) / Initial investment.
= ($4,000 - (100 shares * $40 per share)) / (100 shares * $40 per share).

b. End-of-year stock price = $40:
Total value of investment = 100 shares * $40 per share = $4,000.
Dividend received = $200 (calculated in step 1).
Total return = $4,000 + $200 = $4,200.
Rate of return = (Total return - Initial investment) / Initial investment.
= ($4,200 - (100 shares * $40 per share)) / (100 shares * $40 per share).

c. End-of-year stock price = $42:
Total value of investment = 100 shares * $42 per share = $4,200.
Dividend received = $200 (calculated in step 1).
Total return = $4,200 + $200 = $4,400.
Rate of return = (Total return - Initial investment) / Initial investment.
= ($4,400 - (100 shares * $40 per share)) / (100 shares * $40 per share).

Now, to find the real (inflation-adjusted) rate of return, follow these additional steps:

1. Calculate the inflation-adjusted initial investment: The inflation rate is given as 4 percent. To adjust the initial investment, multiply it by the inflation rate as follows:
Inflation-adjusted initial investment = Initial investment * (1 + inflation rate).
Initial investment = 100 shares * $40 per share = $4,000.
Adjusted initial investment = $4,000 * (1 + 4%) = $4000 * 1.04.

2. Adjust the total return for inflation: Multiply the total return by (1 + inflation rate):
Inflation-adjusted total return = Total return * (1 + inflation rate).
Total return = Calculated value from the previous steps.
Adjusted total return = Total return * (1 + 4%).

Now you have both the rate of return and the inflation-adjusted rate of return for each end-of-year stock price option (a, b, c).