This is a question from Schweser Concept Checkers Pg-178 Book-4 (Equity Section) Q. An Analyst expects a stock selling for $25, per share, to increase to $30 by year end, the dividend last year was $1, but the analyst expects next year’s dividend to be $1.50. What is the expected holding period yield, in this stock? Option A. 20% B. 21.67% C. 24% D. 26% I solved it this way…. And bubbled choice B (considering approximation) Given Data P0 = 25 P1 = 30 D0=1 D1=1.5 HPY= (P1 + D1) / (P0 + D0) - 1 = (30 + 1.5) / (25 + 1) – 1 = 31.5/26 – 1 = 0.2115 = 21.15% But Schweser solves it this way and gets to option ‘D’ = (30 + 1.5) / (25) – 1 = 31.5/25 – 1 = 0.26 = 26% I just can’t remember, at this very moment, why the past dividend of $1 was dropped off when calculating HPY?
Because you didn’t reinvest that $1 back…
Because the dividend was paid last year before you held the stock. You buy it for $25. Sell it for $30 and receive the $1.5 dividend in between.
Both sound correct, but contracting, which one is the true-correct conclusion? - Dinesh S
HPY is just the annual rate of return. Think about it, stock goes from 25 to 30. You get a 1.5 dividend. dont over-analyze.
Inregard to what ymc said, it doesn’t matter if you reinvested the $1 or not, there are no shares involved with the question so it doesnt matter. What matters is taht you have an unknown amount beg. at $25 and finishing the year at $30 and you receive a divident of $1.5
> I just can’t remember, at this very moment, why > the past dividend of $1 was dropped off when > calculating HPY? Because that dividend was already paid and you are calculating a HPY over a future period. Think of it this way. Take the total $s you’ll have at the end of the period and divide it by the total $s you put into the stock (what do you put in, what do you get out?). If you buy the stock today, you pay $25. The $1 dividend has nothing to do with it. You hold the stock 1 year. You end up with a $30 stock and $1.50 in dividends = ($31.50 / $25) -1 = 26%
dinesh, landrybj explained it correctly. Only dividends paid during the time the analyst holds these shares are relevant. Last year’s dividend is irrelevant to this question, it’s reflected in the $25 share price at which the analyst invests.
Thanks all, The question rightfully did the job of fooling me to pick the wrong answer, by providing that extra bit of un-needed, irrelevant information of past dividends. But, m glad that I’m clear on it now and not let the mistake recur on D-day - Dinesh S