Question

Eight years ago, you invested $1,000 in the common stocks of XYZ. The company is known to be "frugal" and never pays out any dividends. You sold all shares and cash out a net proceed of $10,000. What is average annual rate of return from your investment?

Answer 1

To calculate the average annual rate of return, one would use the compound annual growth rate (CAGR) formula, which in this scenario, takes into account the capital gains from selling the shares at a higher price than they were purchased due to the absence of dividends.

Step-by-step explanation:

The question is asking for the calculation of the average annual rate of return on an investment in stocks where dividends are not considered, only the capital gains. This is because XYZ company is described as 'frugal' and does not pay any dividends. The calculation for the average annual rate of return can be found using the formula for compound annual growth rate (CAGR), which is:

CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) - 1

Substituting the given values into the formula:

CAGR = ($10,000 / $1,000) ^ (1 / 8) - 1

After solving, you would find the annual rate of return for this investment.