Question

You invest $100 into a stock. Each quarter a dividend of $1.25 is paid out. Every time you receive a dividend, you reinvest it into the same stock. Assume that at the end of the year the stock price is the same as when you bought it. What is your return on investment?

1.25%
2.5%
5%
105%

Answer 1

Step-by-step explanation:

If you invest $100 and receive a quarterly dividend of $1.25, then you will have received a total of $5 in dividends at the end of the year. Since you reinvest each dividend back into the same stock, your total investment at the end of the year will be the original $100 plus the $5 in dividends reinvested.

Assuming that the stock price remains the same at the end of the year, the total value of your investment at the end of the year will be $105 ($100 initial investment + $5 in reinvested dividends).

Your return on investment can be calculated as follows:

ROI = (Total Value of Investment - Initial Investment) / Initial Investment x 100%

ROI = ($105 - $100) / $100 x 100%

ROI = 5%

Therefore, your return on investment is 5%.