CFA Level I · CFA Level I Exam · Sources of Equity Returns
A share is bought at 80.00. It pays a dividend of 4.00 at the end of month 6, which is immediately reinvested at a share price of 88.00, and the position is valued at 90.00 per share at the end of year 1. The investor holds exactly one original share. The ending value of the holding at year-end is closest to:
The holding is worth about 94.09. The 4.00 dividend buys 0.04545 additional share at 88.00, giving 1.04545 shares, which at 90.00 each are worth 94.09. Ignoring reinvestment would leave only 90.00.
- A90.00
- B94.09Correct
- C94.50
Explanation
Dividend of 4.00 buys 4/88 = 0.04545 share. Total shares = 1.04545. Ending value = 1.04545 × 90.00 = 94.09. Using 94.00 or ignoring reinvestment would understate the value at 90.00, while simply adding 4.00 gives 94.00, which is not an option and ignores the growth of the reinvested shares.
Did you get it right without looking?
One question tells you little. A timed set on Sources of Equity Returns shows your real accuracy, how long you take and where you lose marks.
More Sources of Equity Returns questions
- An analyst builds an equity risk premium estimate with the Ibbotson-Chen supply-side approach. Which of the following inputs is most likely …
- An analyst estimates the expected return on a share by adding the expected dividend yield, the expected growth in earnings per share, and th…
- An analyst estimates the expected return on a stock using the Gordon growth model approach, in which the expected return is the sum of the d…
- An analyst uses the Gordon growth model to estimate the equity risk premium. The forward dividend yield on the index is 2.5%, expected long-…
- An analyst forecasts for a company: earnings growth of 6% a year, dividend yield of 3% and a P/E that falls from 16 to 14 over a three-year …
- A firm that moves from paying out most earnings as dividends to retaining and reinvesting them in profitable projects would most likely shif…