Tom purchased 100 shares of Dalia Co. stock at a price of $121.10 four months ago. He sold all stocks today for $122.48. During the year the stock paid dividends of $6.63 per share. What is Tom’s effective annual rate?
Round the answers to two decimal places in percentage form.
The effective annual rate is computed as shown below:
First of all we shall calculate the holding period return as follows:
= ( Selling price - purchase price + dividends ) / Purchase price
Selling price is computed as follows:
= $ 122.48 x 100
= $ 12,248
Purchase price is computed as follows:
= $ 121.10 x 100
= $ 12,110
Dividends is computed as follows:
= $ 6.63 x 100
= $ 663
So the holding period return will be:
= ( $ 12,248 - $ 12,110 + $ 663 ) / $ 12,110
= 0.06614 Approximately
So the effective annual rate will be:
= [ ( 1 + HPR )1 / n ] - 1
HPR = 0.06614
n = 4 / 12
= 0.33333
By plugging these values in the above mentioned formula, we shall get:
= [ ( 1 + 0.06614 )1 / 0.333333 ] - 1
= 21.18% Approximately
Feel free to ask in case of any query relating to this question
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