Wiley CPA Examination Review Focus Notes by Kevin Stevens

Author:Kevin Stevens
Language: eng
Format: epub
Publisher: John Wiley & Sons, Ltd.
Published: 2010-11-15T16:00:00+00:00

Financial Risk Management

Expected Returns

The total return of an investment includes cash distributions (interest, dividends, rents) and the change in the value of the asset. For example, an investment of $100 that pays a dividend of $3 and then grows in value to $107 at the end of the year has a total return of 10%.

Gordon equation - Total return = Current dividend rate + Annual rate of dividend increase. Expresses total return only in terms of future cash distributions by assuming increased value will allow future distributions. In example, 3% current dividend rate + 7% expected rate of dividend increase = 10%. Effect is identical to adding dividend and value growth.

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