Question

A stock costs $100 and pays a $6 annual dividend. If you expect to sell the stock after seven years for $120, what is your anticipated return on the investment? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest whole number.

Answer 1

To calculate the anticipated return on the investment, we need to consider both the dividends received and the capital gains from selling the stock.

Let's break down the components:

1. Dividends:

The annual dividend is $6, and we will receive it for seven years. Therefore, the total dividends received over seven years will be:

Total dividends = Annual dividend x Years = $6 x 7 = $42

2. Capital gains:

We expect to sell the stock after seven years for $120. Since the initial cost of the stock is $100, the capital gains will be:

Capital gains = Selling price - Initial cost = $120 - $100 = $20

Now, we can calculate the anticipated return on the investment by adding the total dividends and capital gains, and then dividing it by the initial cost of the stock:

Anticipated return on investment = (Total dividends + Capital gains) / Initial cost

Substituting the values:

Anticipated return on investment = ($42 + $20) / $100 = $62 / $100 = 0.62

To convert this decimal representation to a percentage, we multiply it by 100:

Anticipated return on investment = 0.62 x 100 = 62%

Therefore, the anticipated return on the investment is 62% (rounded to the nearest whole number).