Question

# Chaz owns investment A and 1 share of stock B. The total value of his holdings...

Chaz owns investment A and 1 share of stock B. The total value of his holdings is \$350. Stock B is expected to be priced at \$90.32 in 2 years, is expected to pay dividends of \$12.32 in 1 year and \$15.93 in 2 years, and has an annual expected return of 9.60 percent. Investment A has an expected return of R and is expected to pay \$63 per year for a finite number of years such that its first annual payment is expected in 1 year from today and its last annual payment is expected in 5 years from today. What is R, the expected return for investment A? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

First, we need to find the price of stock B

P0 = [D1/ (1 + R)] + [(D2+ P2) / (1 + R)2]

D1 = \$12.32

D2 = \$15.93

P2= \$90.32

P0 = [12.32 / 1.0960] + [(15.93 + 90.32) / (1.0960)2]

= [12.32 / 1.0960] + [106.25 / (1.0960)2] = 11.24 + 88.45 = \$99.69

Value of investment A + price of stock B = \$350

Value of investment A = \$350 - price of stock B = \$350 - \$99.69 = \$250.31

Investment A is an annuity

 Time 0 1 2 3 4 5 Payment # 1 2 3 4 5 Cash Flow 63 63 63 63 63 Present Value 250.31

END mode

Enter 5 63 -250.31 0

N I% PMT PV FV

Solve for 8.19