BUS 106 Chapter 11 Questions and Problems

11.7 Rate of Return A stock is selling today for $40 per share. At the end of the year, it pays a dividend of $2 per share and sells for $44. a. What is the total rate of return on the stock? b. What are the dividend yield and percentage capital gain? c. Now suppose the year-end stock price after the dividend is paid $36. What are the dividend yield and percentage capital gain in this case?

Percentage return = (capital gain + dividend) / initial share price > $4 + $2 / $40 > .15 or 15% Dividend yield = dividend / initial price of share > $2 / $40 > 0.05 or 5% Percentage capital gain = capital gain / initial share price > $4 / $40 > 0.10 or 10% New dividend yield > $2 / $40 > still 0.05 or 5% New Percentage capital gain > -$8 / $40 > -.020 or -20%

11.3 Risk Premium What will happen to the opportunity cost of capital if investors suddenly become especially conservative and less willing to bear risk?

Recall that risk premium is the excess return over the risk-free asset for choosing the risky asset for investment. It arises to induce the investor to invest in the risky asset and not to choose the risk-free asset. Since investors are risk averse, for every unit of risk, they require higher returns. Therefore, the OCC will be increased.

11.6 Risk Premiums Here are the rates of return on a broad stock market index and on Treasury bills between 2013 and 2017. a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium?

Risk premium is the difference between stock market return and T-Bill return. Utilize Excel spreadsheet.