Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

V. Risk and Return 12. Some Lessons from

Capital Market History

(^412) © The McGraw−Hill
Companies, 2002
Dividend $1.85  100 $185
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:
Capital gain ($40.33
37)  100 $333
On the other hand, if the price had dropped to, say, $34.78, you would have a capital
loss of:
Capital loss ($34.78
37)  100 
$222
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:
Total dollar return $185  333 $518
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]
$3,700  518
$4,218
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  100  185
$4,033  185
$4,218
CHAPTER 12 Some Lessons from Capital Market History 383

FIGURE 12.1

Dollar Returns

Dividends

Inflows

Outflows

Ending

market

value

Initial

investment

Time 0 1

• $3,700

$4,218

$185

$4,033

Total