Question

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.

Answer 1

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

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