Question

In 2015 Michael purchased a stock for $45.80 a share. During the year he received $1.71 per share in cash dividends. At the end of December of the same year, he sold the stock for $47.50 a share. What was Michael's TOTAL rate of return for his investment in this stock?

A.) 9.8%

B.) 7.7%

C.) 6.5%

D.) 8.8%

Answer 1

Michael's initial investment is $45.80, the cost of the share.
Michael Receives $1.71 in dividends.
He receives $47.50 for the stock when he sells it.
His profit on the sale of the stock is $47.50 - 45.80 = $1.70.
His total return on the stock is his total earnings, the dividends plus his profits on the sale of the stock, divided on what he paid initially, $45.80:
(1.71 + 1.70) ÷ 45.80 = .0744 = 7.45%
7.45% return on investment in less than a year, not bad!
Closest answer is 7.7%, not sure why it isn't exactly 7.45 or 7.5%.

Answer is B) 7.7%