At the beginning of 2024, you used a budget of $24900 to buy shares of YMH stock for $49.8 per share. In the middle of the year, the stock paid $0.6 per share in dividends, and its ex-dividend price was $60. You re-invested the dividends then, and the stock paid no dividends afterward. You sold the stock for $71.4 at the end of the year. You do not pay any taxes on this investment.

What is your total net return from investing in the YMH stock?

Question

At the beginning of 2024, you used a budget of $24900 to buy shares of YMH stock for $49.8 per share. In the middle of the year, the stock paid $0.6 per share in dividends, and its ex-dividend price was $60. You re-invested the dividends then, and the stock paid no dividends afterward. You sold the stock for $71.4 at the end of the year. You do not pay any taxes on this investment.

What is your total net return from investing in the YMH stock?

BlackTom AI · Accepted Answer

We start by unpacking the investment scenario step by step and laying out the cash flows and share counts as they occur.

- Initial purchase: You have a budget of $24,900 and buy YMH stock at $49.80 per share. Number of shares purchased = 24,900 / 49.80 = 500 shares exactly.
- Mid-year dividend: Each share pays $0.60 in dividends. Total dividends received = 500 × $0.60 = $300. These dividends are reinvested at the mid-year price of $60, so you buy additional shares = 300 / 60 = 5 shares. New total shares outstanding = 500 + 5 = 505 shares.
- End of year sale: You sell all shares at $71.40 per share. Ending value of shares = 505 × $71.40 = $36,057.
- Are there any extra cash flows to include beyond the end value? The $300 of dividends were reinvested to buy 5 more shares, so there is no separate cash payout to account for at year end. Therefore, the total value for return calculation is just the ending value of the investment, $36,057, relative to the initial investment of $24,900.

Now we compute net return:
- Net gain = Ending value − Initial investment = $36,057 − $24,900 = $11,157.
- Net return percentage = (Net gain / Initial investment) × 100 = ($11,157 / $24,900) × 100 ≈ 44.8%.

Evaluating the provided options:
- Option: None of the other answers are correct. This would be true only if every other option were off; however, we will verify the others to see which ones align with the calculated figure.
- Option: 44.36%. This is a lower estimate than the precise calculation. The exact ratio 11,157 / 24,900 equals approximately 0.4479, which would be 44.79% when rounded to two decimals, not 44.36%. This underestimates the return due to a slight miscalculation in either the ending value or the net gain.
- Option: 44.81%. This matches the computed 44.8% when rounded to two decimals (11,157 / 24,900 ≈ 0.4479 ≈ 44.79% or 44.81% depending on rounding conventions). It aligns with the end-of-year sale value and the reinvested-dividend mechanics.
- Option: 43.37%. This would correspond to a smaller ending value or larger initial cost relative to the actual figures; it does not reflect the reinvestment buy of 5 additional shares that occurred due to the $300 dividend infusion.
- Option: 39.03%. This is markedly low and would imply a much smaller gain relative to the initial investment, inconsistent with the actual cash flows and final sale amount here.

In summary, the calculation hinges on 500 initial shares, 5 additional shares bought with reinvested dividends, a year-end price of $71.40, and no separate cash outflows or inflows at year end beyond the final sale value. The precise net return computes to about 44.8%, which corresponds to the 44.81% option.

COMM_V 371 101-107 2025W1 COMM 371 2025W1 Midterm - Nov 04 - Requires Respondus LockDown Browser

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