Question

Jack earned a 16.4 per cent return on a share that he purchased one year ago. The share is now worth $10.70, and he just received a dividend of $0.62. How much did Jack originally pay for the share? (in dollars to the nearest cent; don’t use $ sign)

Answer 1

Solution :

The return received on a share is calculated using the following formula :

Return = ( Current market price + Dividend per share – Purchase price ) / Purchase price

As per the information given in the question we have

Return on share = 16.4 % = 0.164 ; Current market price = $ 10.70 ; Dividend per share = $ 0.62 ; Purchase price = To find   ;

Applying the above values in the formula we have purchase price or amount originally paid for the share as

0.164 = ( $ 10.70 + $ 0.62 – X ) / X

0.164X = $ 10.70 + $ 0.62 - X

0.164X = $ 11.32 – X

X + 0.164X = $ 11.32

1.164X = $ 11.32

X = $ 11.32 / 1.164

X = $ 9.725086

X = $ 9.73 ( when rounded off to two decimal places )

Thus the amount that Jack originally pay for the share = $ 9.73

The solution is = 9.73