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. Dividend Rate

    The total expected dividend payments from an investment, fund ...
  6. Forward Dividend Yield

    An estimation of a year's dividend expressed as a percentage ...

You May Also Like

Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center