Question

Ashley purchased a stock at a price of $27 a share. She received quarterly dividends of $0.75 per share. After one year, Ashley sold the stock at a price of $29.25 a share. What is her percentage total return on this investment? (Hint: Ashley will receive 4 quarterly dividends during the year she held the stock.)

A) Approximately 12.5%
B) Approximately 14.81%
C) Approximately 11.11%
D) Approximately 8.33%

Answer 1

Ashley's percentage total return on the investment is approximately 14.81%. So, the correct option is B) Approximately 14.81%.

Explanation:

Ashley bought the stock at $27 a share and received quarterly dividends of $0.75 per share, totaling $3 per share for the year. The stock's selling price was $29.25 a share after a year. Her gain from dividends is $3 per share, and the capital gain per share is $2.25 ($29.25 - $27). Therefore, the total gain per share is $5.25 ($3 + $2.25). To find the percentage return, divide the total gain per share by the initial cost per share ($27) and multiply by 100. This results in a total return of approximately 19.44%. However, to calculate the annualized return, divide this by the holding period (1 year), giving an approximate annualized return of 14.81%.

Ashley's investment yielded a total gain of $5.25 per share over a year. This consists of both dividends received and the capital gain from selling the stock. Dividing this total gain by the initial cost of the investment ($27) provides the return on investment as a percentage. Annualizing this result by considering the investment duration (1 year) yields the approximate annual return of 14.81%. Therefore, Ashley's total return on this investment, considering dividends and capital gains, amounts to approximately 14.81%.

So, the correct option is B) Approximately 14.81%.