Steve bought a share of Toronto Skates Inc.three years ago for $45.00.He was paid two annual dividends of $4.50 in the past two years.If the stock price today is $ 48.50, which of the following are the three year's income yield (IY), capital gain (CGY), and total return (TR).
A)IY=7.78%, CGY=20.00%, TR=27.78%
B)IY=20.00%, CGY=9.26%, TR=29.26%
C)IY=20.00%, CGY=7.78%, TR=27.78%
D)IY=7.78%, CGY=9.26%, TR=17.04%

Question

Quizplus · Accepted Answer

To calculate the income yield (IY), we add up the two annual dividends ($4.50 + $4.50) and divide by the original purchase price ($45.00):

IY = (2 x $4.50) / $45.00 = 0.20 or 20.00%

To calculate the capital gain yield (CGY), we subtract the original purchase price from the current price and divide by the original purchase price:

CGY = ($48.50 - $45.00) / $45.00 = 0.0778 or 7.78%

To calculate the total return (TR), we add the income yield and the capital gain yield:

TR = IY + CGY = 0.20 + 0.0778 = 0.2778 or 27.78%

Therefore, the best choice is C.

Steve Bought a Share of Toronto Skates Inc