CFA Level I · CFA Level I Exam · Sources of Equity Returns
A company's share price is 40.00 and it pays an annual dividend of 1.60 per share. The share price rises to 42.00 by year-end, when the dividend is paid. The investor's total return for the year is closest to:
Total return is about 9.0%. The price gain of 2.00 on a 40.00 starting price gives 5.0%, and the 1.60 dividend adds a 4.0% dividend yield. Leaving out either component, as the other options do, understates the investor's return.
- A4.0%
- B5.0%
- C9.0%Correct
Explanation
Price return = 2/40 = 5.0%. Dividend yield = 1.60/40 = 4.0%. Total return = 5.0% + 4.0% = 9.0%. The 5.0% choice ignores dividend income and the 4.0% choice ignores the price gain.
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