Question

Jan purchased 100 shares of Peach Computer stock for $15 per share, plus a $14 brokerage commission. Every 6 months she received a dividend from Peach of 35 cents per share. At the end of 2 years, just after receiving the fourth dividend, she sold the stock for $21 per share and paid a $58 brokerage commission from the proceeds. What annual rate of return did she receive on her investment?

Answer 1

The annual rate of return did she receive on her investment is 20.05%

Step-by-step explanation:

Use following formula to calculate the rate of return

Holding period return = ( Income from Investment + Price appreciation ) / Initial value of the shares

Where

Income - Dividend Received = 100 shares x $0.35 x 4 semiannual periods = $140

Price appreciation = ( ( $21 x 100 shares ) - $58 ) - ( ( $15 x 100 shares ) + $14 )

Price appreciation = $2042 - $1,514

Price appreciation = $528

Now calculate the holding period return

Holding period return = ( $140 + $528 ) / $1,514

Holding period return = 44.1215%

Now annualise the return as follow

Annual rate of return = ( Holding period return + 1 )^1/2 - 1

Placing values in the formula

Annual rate of return = ( 44.1215% + 1 )^1/2 - 1

Annual rate of return = 20.05%