National Telephone and Telegraph (NTT) Company common stock
currently sells for $60 per share. NTT is expected to pay a $4 dividend
during the coming year, and the price of the stock is expected to increase
to $65 a year from now. Determine the expected (ex-ante) percentage
holding period return on NTT common stock.
b. Suppose that 1 year later, NTT’s common stock is selling for $75 per
share. During the 1-year period, NTT paid a $4 common stock dividend.
Determine the realized (ex-post) percentage holding period return on
NTT common stock.
c. Repeat (b) given that NTT’s common stock is selling for $58 1 year later.
d. Repeat (b) given that NTT’s common stock is selling for $50 1 year later.
To determine the expected (ex-ante) percentage holding period return, we need to consider the dividend and the expected stock price increase.
a. The dividend is expected to be $4, and the expected stock price a year from now is $65. Therefore, the expected (ex-ante) percentage holding period return can be calculated as:
[(Dividend + Expected Price Increase) / Stock Price] x 100
= [(4 + (65 - 60)) / 60] x 100
= [(4 + 5) / 60] x 100
= (9 / 60) x 100
= 15%
Therefore, the expected (ex-ante) percentage holding period return on NTT common stock is 15%.
b. The realized (ex-post) percentage holding period return can be calculated using the same formula, but with the actual stock price and dividend.
The stock price is $75, and the dividend paid during the year is $4. Therefore, the realized (ex-post) percentage holding period return can be calculated as:
[(Dividend + Price Increase) / Stock Price] x 100
= [(4 + (75 - 60)) / 60] x 100
= [(4 + 15) / 60] x 100
= (19 / 60) x 100
= 31.67%
Therefore, the realized (ex-post) percentage holding period return on NTT common stock is approximately 31.67%.
c. To calculate the realized (ex-post) percentage holding period return when the stock price is $58, we will use the same formula:
[(Dividend + Price Increase) / Stock Price] x 100
= [(4 + (58 - 60)) / 60] x 100
= [(4 - 2) / 60] x 100
= (2 / 60) x 100
= 3.33%
Therefore, the realized (ex-post) percentage holding period return on NTT common stock is approximately 3.33%.
d. Using the same formula, when the stock price is $50:
[(Dividend + Price Increase) / Stock Price] x 100
= [(4 + (50 - 60)) / 60] x 100
= [(4 - 10) / 60] x 100
= (-6 / 60) x 100
= -10%
Therefore, the realized (ex-post) percentage holding period return on NTT common stock is -10%.