I printed these practice questions to review for my test tomorrow but they just give the answer it doesn't show how to work them.

**mountain minerals pays a constant annual dividend. One year ago when you purchased shares of that stock at $40 a share, the dividend yield was 6.5%. Over this past year, the inflation rate has been 3.2%. Today the reuired return on this stock is 9.8% and you just sold all of your shares. What is your total real return on this investment?

First figure out exactly what that "constant annual dividend" is, in dollars. For that answer, you note that when you gave $40 for a share, the dividend yield was 6.5%. (That means the dividend, in dollars, was 6.5% of the share price.)

Knowing how much dividend-per-share Mountain Minerals is paying each year, you now figure out the price at which you sold the stock. When a stock is paying a constant dividend amount each year, the stock's price will be

(Annual Dividend Amount) (Required Return). Be sure to put the required return into decimal form for that computation.

Now you know how much you sold the stock for. (Took a loss, didn'tcha? Intuitively, you knew that already, since the annual dividend, a constant amount, went from being 6.5% of the stock price--when you bought--to being 9.8% of the price when you sold. Only way for that to happen is for the dividend to go up, or for the price to go South.)

But there's one piece of good news. Just before you sell the stock, you pick up the annual dividend. Technically, your problem doesn't say exactly when you receive the dividend, but many similar problems make the simplifying assumption that you purchase the stock immediately after a dividend payment. Following that premise--which I'll do here--you receive a dividend payment immediately prior to selling the stock.

Therefore, the total dollars you receive after one year is the selling price, which you computed above, plus the annual dividend.

Almost done. To figure your 'real' (aka 'after inflation') return, got to translate those dollars you received after one year (selling price + dividend) back into their pre-inflation equivalent value, measured as of the time you first bought the stock. That way, when you compare the number of dollars you paid for the stock, with the number of dollars you received one year later when you exited the stock, you're comparing dollars of the same 'purchasing power'... hence, you'll be computing your 'real' rate of return for that 1-year holding period.

Deflating your 'received-at-the-end' dollars is just a matter of dividing them by (1 + i), where i is the inflation rate. Again, be sure to express i as a decimal for this one.

OK, time for the big finish. The return on any investment is given by

[(Dollars received at the end) (Purchase price) - 1]. In this case, you want to use your 'deflated' selling dollars in the numerator, in order that the answer is your 'real' return.

You already knew you had a negative return, since you sold for less than you paid for it, but now you can see exactly what your post-inflation negative return was, in % terms. At least the receipt of the dividend kept the return from being even uglier than it was. Last order of business is to go fire the broker who put you into Mountain Minerals a year ago, take the loss on your tax return, and call it a day.