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Finance Question - Please Show Work?

Last year, you purchased a stock at a price of $50 a share. Over the course of the year, you received $2.2 in dividends and inflation averaged 2.8 percent. Today, you sold your shares for $53.6 a share. What is your approximate real rate of return on this investment?

2 Answers

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  • 9 years ago
    Favorite Answer

    You have gained 3.6 ( 53.6 - 50) which works out to 7.2% if we deduct inflation the net increase is

    7.2 - 2.8 = 4.4%. Dividend is an extra income so taken into account on this trading profit.

  • 9 years ago

    my first guess (because you said "ror ON THIS INVESTMENT") is

    2.20 + 3.60 dividend = 5.80 x (1.00 - .028 inflation aka .972) = 5.6376; /50 invested = 11.2752%

    but I do not like that answer because the $50 also lost purchasing power, so ...

    55.80 x .972 = 54.2376 in YE purchasing power ( x 2, - 2 shares at 50 each) = 8.4752% real

    would be the answer I would go with.

    Source(s): a very rusty accounting degree, and too much real world experience to relate to neat and tidy (and unrealistic) textbook problems.
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