Question

Exactly one year ago, Harv bought 500 shares of Primer Corp stock for $20.75 per share. He plans on selling all of the shares today at the current market price of $22.50 per share. Over the last year, Primer Corp. paid out dividends of $0.75 per share on its common stock. What is Harv’s holding period return for the year on Primer Corp. stock? Submit your answer as a percentage and round to two decimal places.

1. Describe and interpret the assumptions related to the problem.
2. Apply the appropriate mathematical model to solve the problem.
3. Calculate the correct solution to the problem

Answer 1

The following data is available with us:

Number of shares = 500

Buying price = $20.75

Selling price = $22.50

Divedend = $0.75

The assumption is that after one year the prices of the shares have increased and the investor wants to utilise this price rise to make a profit. It is general that an investor want to but at the lowest price and sell on highest price. This gives the investor gain.

Holding period return = [(Capital gain + Dividend)/Buying price)]*100%

= [(Selling price - buying price+dividend)/buying price]*100%

= [(22.5 - 20.75 + 0.75)/20.75]*100%

= [(2.5)/20.75]*100%

= [0.12048]*100%

= 12.048%

= 12.05% (Rounded up to two decimal places)