Question

At time = 0 you purchase 100 shares of a stock for the market price of...

At time = 0 you purchase 100 shares of a stock for the market price of $12 per share. At time = 1 the stock is worth $15 per share. Sometime after time = 1, but before time = 2, the stock has a 3:1 split. At time = 2 you sell all your shares for the market price of $8 per share. What is the return on your stock investment over the second period (i.e. from time=1 through time=2)?

Homework Answers

Answer #1

We need to find the return from period 1 to 2. So period 1 is considered the base.

At the start of the period 1, the stock price was $15. During this time there was a 3:1 stock split. So 100 shares turned to 300, but the stock price will fall.

So at end of period 1, the total share value was:

= Number of shares * Share price

= 100 * 15

= 1,500

At the end of period 2, the Investment value is

=Number of shares * Share price

= 300 * 8

= 2400

So return on Investment = (Ending Value - Begining Value) / Begining value * 100

= (2400 - 1500) / 1500 * 100

= 60%

So the return on the stock investment is 60%

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