Figure 121

Dollar Returns

Also, the value of the stock has risen to $40.33 per share by the end of the year. Your 100 shares are now worth $4,033, so you have a capital gain of:

On the other hand, if the price had dropped to, say, $34.78, you would have a capital loss of:

Notice that a capital loss is the same thing as a negative capital gain.

The total dollar return on your investment is the sum of the dividend and the capital gain:

Total dollar return = Dividend income + Capital gain (or loss) [12.1]

In our first example, the total dollar return is thus given by:

Notice that, if you sold the stock at the end of the year, the total amount of cash you would have would equal your initial investment plus the total return. In the preceding example, then:

Total cash if stock is sold = Initial investment + Total return [12.2]

As a check, notice that this is the same as the proceeds from the sale of the stock plus the dividends:

Proceeds from stock sale + Dividends = $40.33 X 100 + 185

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

V. Risk and Return

12. Some Lessons from Capital Market History

© The McGraw-Hill Companies, 2002

PART FIVE Risk and Return

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