Question

On February 20, you bought shares of stock in Microsoft (MSFT), at $107.15 per share. One quarter later, in mid-May, you sold your shares at a price of $126.02/share. An instant before the sale, you received a dividend of $0.46/share.1 a. (i) Compute the total (or holding period) percentage return on your investment. (ii) Translate the quarterly return from part a(i) into an effective annual return. // Total return can be decomposed into two components. b. Calculate the dividend yield. c. Calculate the capital gains yield.

Answer 1

(a)

(i)

HPR = (sale price + dividend - purchase price) / purchase price

HPR = ($126.02 + $0.46 - $107.15) / $107.15

HPR = 18.04%

(ii)

EAR = (1 + quarterly return)⁴ - 1

EAR = (1 + 18.04%)⁴ - 1

EAR = 94.14%

(b)

dividend yield = dividend / purchase price

dividend yield = $0.46 / $107.15

dividend yield = 0.43%

(c)

capital gains yield =  (sale price - purchase price) / purchase price

capital gains yield =  ($126.02 - $107.15) / $107.15

capital gains yield = 17.61%