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solution

Assume that $10,000 was invested in the stock of General Medical Corporation with the intention of selling after one year. The stock pays no dividends, so the entire return will be based on the price of the stock when sold. The opportunity cost of capital on the stock is 10 percent.

a. To begin, assume that the stock sale nets $11,500. What is the dollar return on the stock investment? What is the rate of return?

b. Assume that the stock price falls and the net is only $9,500 when the stock is sold. What is the dollar return and rate of return?

c. Assume that the stock is held for two years. Now, what is the dollar return and rate of return?

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