Question

Jason purchased ABC stock at $40 per share and DEF stock at $35 per share on the same day in 2015. Exactly 6 months later, the ABC stock is worth $42.00 per share and has not paid a dividend while the DEF stock is worth $36 per share and has paid 2 quarterly dividends of $0.50 each. The holding period returns are _______.
A) ABC, $2.00 and DEF $2.00.
B) ABC 5% and DEF 2.9%.
C) ABC 5% and DEF 5.7%.
D) The holding period return cannot be determined because we do not know the discount rate.

Answer 1

Answer:

C) ABC 5% and DEF 5.7%

Explanation:

Data provided in the question:

Purchasing Cost of Stock ABC purchased = $40 per share

Purchasing Cost of Stock DEF purchased = $35 per share

Time = 6 months

Selling price of share of ABC = $42 per share

Selling price of DEF share = $36

Dividend paid to the DEF = $0.5 each quarter i.e $0.5 twice in 6 months

Thus,

Total dividend paid to DEF = $0.5 × 2

= $1

Now,

For ABC

Total return = Selling price - Purchasing Cost

= $42 - $40

= $2 per share

thus,

Holding period return = [ Total return ÷ Purchasing cost ] × 100%

= [ $2 ÷ $40 ] × 100%

= 5%

For DEF

Total return = Selling price + Dividend received - Purchasing Cost

= $36 + $1 - $35

= $2 per share

thus,

Holding period return = [ Total return ÷ Purchasing cost ] × 100%

= [ $2 ÷ $35 ] × 100%

= 5.7%

Hence,

option C) ABC 5% and DEF 5.7%.