Question

You purchased 200 shares of Frozen Foods stock for $42 a share eight months ago. Today, you received a dividend of $0.40 a share and also sold the shares for $46 each. What was your effective annualized rate of return on this investment?

Answer 1

Answer is 16.12%

Purchase Price = $42.00
Dividend = $0.40
Selling Price = $46.00
Holding Period = 8 months

Holding Period Yield = (Selling Price + Dividend - Purchase Price) / Purchase Price
Holding Period Yield = ($46.00 + $0.40 - $42.00) / $42.00
Holding Period Yield = $4.40 / $42.00
Holding Period Yield = 0.104762 or 10.4762%

Annualized Rate of Return = (1 + Holding Period Yield)^(12 / Holding Period) - 1
Annualized Rate of Return = (1 + 0.104762)^(12 / 8) - 1
Annualized Rate of Return = 1.1612 - 1
Annualized Rate of Return = 0.1612 or 16.12%