Question

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $50.00 per share. What is its effective annual (not nominal) rate of return?

Select the correct answer.

a. 8.84%

b. 8.64%

c. 8.44%

d. 8.24%

e. 9.04%

Answer 1

Ans:- Annual rate of return for the stock will be $1.00 * 4 / $50 = 8%.

Effective annual rate of return is given by (1 + r / m )^m - 1, where r is the rate of return, m is the number of times compounding per period.

Effective annual rate of return = (1 + 8% / 4 )^4 - 1 = 8.24%. ( m is 4 because there are 4 quarters in a year,so the number of times compounding in a year is 4 ).

Therefore, the effective annual rate of return is 8.24%. option (d) is the right answer.

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