SESI 10

THREAD 2

An analyst predicted last year that the stock of Logistics, Inc., would offer a total return
of at least 10% in the coming year. At the beginning of the year, the firm had a stock
market value of $10 million. At the end of the year, it had a market value of $12 million
even though it experienced a loss, or negative net income, of $2.5 million. Did the analyst’s
prediction prove correct? Explain using the values for total annual return.

rt= Ct+Pt-Pt-1
Pt-1
10%
rt= Total rate of return
Ct is cash flow received during the period
Pt is the end-of-period value
Pt-1 is the beginning of the period value

Ct -
Pt 12,000,000
Pt-1 10,000,000

rt 20%

Logistics, Inc. exceeded the annual rate of return predicted by the analyst. The negative net income is irrelevant to the problem.

Yes, the analyst's prediction is correct because the firm's total rate of return is even higher than the predicted one regardless of the
negative income.
1