Given that the beginning value of a stock is $120, the ending value is $110, earnings are $40, and the retention rate of earnings is 0.6, what is the rate of return on the stock over this period?
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A. B. C. D. E.C
The dividend payout ratio is equal to one minus the retention rate (1 - 0.6 = 0.4). Dividends are equal to the dividend payout ratio multiplied by earnings (0.4 x 40 =
$16). The rate of return is equal to the ending price plus the dividend payments, divided by the beginning price, minus one. In this question, the rate of return is
[(110 + 16)/ 120] - 1 = 0.05 = 5%.