Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200.
-What was the expected return on the investment as on January 1,2014?
A)110 percent.
B)10 percent.
C)20 percent.

Question

Suppose that on January 1, 2014, you bought 100 shares of M.Co for $100 per share with the expectation of receiving a perpetual dividend of $10 per share. On January 1, 2015, M.Co announces that it will increase its annual dividend to $20 per share. Upon announcement, the stock price rises to $200. 
-What was the expected return on the investment as on January 1,2014?
A)110 percent.
B)10 percent.
C)20 percent.

Quizplus · Accepted Answer

The expected return on the investment as of January 1, 2014, can be calculated using the dividend yield formula for a perpetual dividend, which is Dividend per Share / Price per Share. Given the initial expectation of a $10 annual dividend on a $100 share price, the expected return is $10 / $100 = 0.10 or 10 percent.

Suppose That on January 1, 2014, You Bought 100 Shares