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 / Stock Price
2. Capital-Gains Yield = (Ending Stock Price - Beginning Stock Price) / Beginning Stock Price
3. Return = Current Yield + Capital-Gains Yield
Let's calculate each of these components step by step:
1. Current Yield:
The dividend is given as $2, and the stock price at the beginning of the year is $50. Apply the formula:
Current Yield = $2 / $50 = 0.04, or 4%
2. Capital-Gains Yield:
The beginning stock price is $50, and the ending stock price is $53. Apply the formula:
Capital-Gains Yield = ($53 - $50) / $50 = $3 / $50 = 0.06, or 6%
3. Return:
To find the return, we add the current yield and capital-gains yield. Apply the formula:
Return = 0.04 + 0.06 = 0.10, or 10%
Therefore, the stock's current yield is 4%, the capital-gains yield is 6%, and the return is 10%.
Final calculations:
- Current Yield: $2 / $50 = 0.04 or 4%
- Capital-Gains Yield: ($53 - $50) / $50 = 0.06 or 6%
- Return: 0.04 + 0.06 = 0.10 or 10%