CFA Level I · CFA Level I Exam · Sources of Equity Returns
An investor buys one share at 100.00. After six months it pays a dividend of 3.00, reinvested at 96.00 per share. At the end of the year the share price is 110.00. The investor's total return for the year, including the reinvested dividend, is closest to:
The total return is about 13.4%. The 3.00 dividend buys 0.03125 share at 96.00, giving 1.03125 shares worth 113.44 at 110.00 each, versus a 100.00 cost. Simply adding the dividend gives 13.0%, understating the benefit of reinvestment.
- A10.0%
- B13.0%
- C13.4%Correct
Explanation
Shares bought with dividend = 3.00/96.00 = 0.03125. Total shares = 1.03125. Ending value = 1.03125 × 110.00 = 113.44. Return = 113.44/100 − 1 = 13.4%. The 13.0% answer assumes the dividend is simply added (110 + 3) without reinvestment, and 10.0% ignores the dividend entirely.
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