Q:
Cousin Eddie purchased 250 shares of WES stock for $10,000. One year later, he sold the 250 shares for $10,750. During the time he held the stock, he received a dividend payment of $1.00 per share, inflation was 3% for the year. He asks you to help him determine his total return. Which of the following best describes the calculation that you will use?
a) Capital appreciation of stock plus dividends received, divided by initial investment
b) Capital appreciation of stock less inflation rate, divided by initial investment
c) Capital appreciation of stock plus dividend received less inflation rate, divided by initial investment
d) Capital appreciation of stock plus dividends received, divided by sale amount of investment
A:

The correct answer is a)
For equity investments, the total return is:

Capital appreciation + dividends received
Initial Investment

In the example, the capital appreciation is $750 ($10,750-$10,000), the dividend received is $250 ($1.00 multiplied by 250 shares), for a total gain of $1,000. You then divide your total gain ($1,000) by the initial investment ($10,000) for a total return of 10%.


RELATED FAQS

  1. John purchased 100 shares of XYZ stock for $50 per share. He held the stock for ...

    The correct answer is b. The Holding Period Return (HPR) is the total return (income, dividends, plus capital appreciation ...
  2. What is the difference between dividends and capital gains?

    Read about some of the differences between dividends and capital gains, the two primary ways of accumulating wealth through ...
  3. What is the difference between capital gains and investment income?

    Learn about the difference between capital gains and other types of investment income, such as dividends paid on stock or ...
  4. Are dividends the best way to make money for retirement?

    Using dividends for retirement income can provide a hedge against a variety of risks, but investors need to be aware of the ...
  5. Which is more important - dividend yield or total return?

    Learn to distinguish between those times when dividend yield or total return is a more useful performance metric for a company's ...
  6. What is the difference between yield and dividend?

    Learn how to differentiate between dividend yield and dividend return, and see why dividend yield is the more popular rate ...
RELATED TERMS
  1. Capital Appreciation

    A rise in the value of an asset based on a rise in market price. ...
  2. Total Return

    When measuring performance, the actual rate of return of an investment ...
  3. Indicated Yield

    The dividend yield that a share of stock would return based on ...
  4. Dividend Adjusted Return

    When a stock's return is calculated using not only the stock's ...
  5. Stock Dividend

    A dividend payment made in the form of additional shares, rather ...
  6. Forward Dividend Yield

    An estimation of a year's dividend expressed as a percentage ...
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center