You purchase 100 shares of stock for $25 a share. The stock pays a $2 per share dividend at yearend.
a. What is the rate of return on your investment if the endofyear stock price is (i) $23; (ii) $25; (iii) $28? (Leave no cells blank  be certain to enter "0" wherever required. Enter your answers as a whole percent.)
b. What is your real (inflationadjusted) rate of return if the inflation rate is 5%? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)
a)
(i) 
(ii) 
(iii) 

Number of shares 
100 
100 
100 
Buying Price (BP) 
25 
25 
25 
Dividend Paid (D) 
2 
2 
2 
Selling Price (SP) 
23 
25 
28 
Return $ (= SP  BP + D) 
0 
2 
5 
Return% = Return$/BP % 
0.00% 
8.00% 
20.00% 
b)
In order to calculate Real rate of return, you need to use the formula
When stock price is 23, Real rate of return = ((1 + 0%) / (1 + 5%)) 1 =  4.76%
When stock price is 25, Real rate of return = ((1 + 8%) / (1 + 5%)) 1 = 2.86%
When stock price is 28, Real rate of return = ((1 + 20%) / (1 + 5%)) 1 = 14.29%
In some textbooks, you will also read a simplified form of Real rate of return, which is:
Nominal rate of Return = Real Rate of Return + Inflation
This is an approximate version, whereas the one we used to calculate is the accurate form.
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