Understanding Returns, Net Returns and Rate of Returns
Financial concept is not completed without the term ‘return’. It is the basic building block of finance. Without return, no investment making decision is possible. So being related to the financial world, one should be clear about this concept. We invest in any security with the expectation of getting something as return. No body invests just like that. He/she expects some returns out of his/her investment. The returns that we get in some period from now, if we invest today is the absolute monetary value. Net returns are the returns minus the initial investment. It is also presented in the absolute monetary value. Whereas the rate of returns is calculated by dividing the net returns with the initial investment amount. It is presented in terms of percentage. Let’s clarify these terms with examples just like finance homework solutions.
For example, a project has an initial cost of $5000 and it returns $7000 in period one.Here period one denotes any time in future. It could be tomorrow, after six months or after two years. Now, returns from this investment is $7,000. Net returns for this investment can be calculated as given below:
Financial concept is not completed without the term ‘return’. It is the basic building block of finance. Without return, no investment making decision is possible. So being related to the financial world, one should be clear about this concept. We invest in any security with the expectation of getting something as return. No body invests just like that. He/she expects some returns out of his/her investment. The returns that we get in some period from now, if we invest today is the absolute monetary value. Net returns are the returns minus the initial investment. It is also presented in the absolute monetary value. Whereas the rate of returns is calculated by dividing the net returns with the initial investment amount. It is presented in terms of percentage. Let’s clarify these terms with examples just like finance homework solutions.
For example, a project has an initial cost of $5000 and it returns $7000 in period one.Here period one denotes any time in future. It could be tomorrow, after six months or after two years. Now, returns from this investment is $7,000. Net returns for this investment can be calculated as given below:
For profitable projects, returns are always higher than the initial investment. As a result, net returns will be always positive for profitable projects. The period over which this 40% rate of return has earned, is known as a holding period. And the rate of return received over this period is called holding period return.
In case of dividend paying stock, calculation of the rate of return is a little bit different. Here, purchase price of stock is considered as initial investment and selling price of stock at the end of the holding period is considered as returns. Assume, stock is paying dividend in between the holding period. The dividend is also treated as the return from stock. Let’s take an example. Consider stock of a company XYZ is purchased at $90 and it is sold for $110. Dividend received by the investor is $10. Now the rate of return for this stock will be calculated as given below:
For dividend paying stock, the rate of return can be divided into two components as given below:
• Capital yield
• Dividend yield
Capital yield is the appreciation or depreciation in the stock price expressed in the percentage term. The dividend is the ratio of dividend and initial purchase price of the stock. For the above example, these yields are calculated as shown below:
• Capital yield
• Dividend yield
Capital yield is the appreciation or depreciation in the stock price expressed in the percentage term. The dividend is the ratio of dividend and initial purchase price of the stock. For the above example, these yields are calculated as shown below:
In total, the rate of return for this stock is the sum of capital yield and the dividend yield; 22.22%+11.11%=33.33%. Positive return/yields reflect the profitable investment. Here, one thing is interesting to know that even if capital yield is negative, the stock will be profitable. Negative capital gain means the selling price is less than the purchase price. At one glance, it tells that the stock is not profitable one. But, if the dividend yield is high enough to offset the negative effect of the capital yield, the rate of return on this stock turns to be positive; profitable one. Let’s take an example. Consider a stock with a purchase price of $100 and a selling price of $90. Then, the capital yield will be -10% (=(-$10/100)*100). Suppose, the dividend on this stock over the holding period is $20. Now, the dividend yield will be +20% (=($20/100)*100). Here, the rate of return will be 10% (=20%-10%). It shows the given stock is profitable one. Earlier, the stock was seemed non-profitable as reflected by capital gain. But, in fact, it is profitable stock. How did it happen? The reason is the negative impact of capital yield was offset by the high value of positive dividend yield. As a result, the rate of returns, turns to be positive leading the stock as a profitable one.
In case of bonds, coupon payment is provided instead of dividend. So, in the case of bonds, dividend yield is replaced by the coupon yield.
Normally, the rate of return is focused. Generally, people or investors are interested in knowing the rate of return. They talk the benefit from a stock or from a bond in terms of its return. In day to day financial language, return and rate of return are used interchangeably. Then a question arises why we have to calculate the dividend/coupon yield and capital yield separately. The answer is very simple.Some taxation systems such as IRS treat the capital yield and the dividend yield separately. The applicable tax rate for them are different.So these have to be calculated separately. Next thing, separate calculation facilitates the investors and analysts to get the clear picture of the return so as to analyze it precisely.
Usually, the parameters have advantages and disadvantages associated with them. Similarly rate of return has advantages and disadvantages. We have already discussed a lot about its advantages as it helps to identify the profitable investments. It has drawback also. In case of rate of return, the time value is not considered. The holding period is not included in the calculation of the rate of returns. And if all this is a little too much for you then you can always hire professional assignment experts to help you out,
In case of bonds, coupon payment is provided instead of dividend. So, in the case of bonds, dividend yield is replaced by the coupon yield.
Normally, the rate of return is focused. Generally, people or investors are interested in knowing the rate of return. They talk the benefit from a stock or from a bond in terms of its return. In day to day financial language, return and rate of return are used interchangeably. Then a question arises why we have to calculate the dividend/coupon yield and capital yield separately. The answer is very simple.Some taxation systems such as IRS treat the capital yield and the dividend yield separately. The applicable tax rate for them are different.So these have to be calculated separately. Next thing, separate calculation facilitates the investors and analysts to get the clear picture of the return so as to analyze it precisely.
Usually, the parameters have advantages and disadvantages associated with them. Similarly rate of return has advantages and disadvantages. We have already discussed a lot about its advantages as it helps to identify the profitable investments. It has drawback also. In case of rate of return, the time value is not considered. The holding period is not included in the calculation of the rate of returns. And if all this is a little too much for you then you can always hire professional assignment experts to help you out,