Question

Tom purchased 100 shares of Dalia Co. stock at a price of $123.61 four months ago. He sold all stocks today for $125.48. During the year the stock paid dividends of $6.31 per share. What is Tom’s effective annual rate?

Answer 1

Dalia Co. stock price four months ago (Bought) = $123.61

Dalia Co. stock price today (Sold)= $125.48

Holding period = 4 months = 4/12 = 0.3333 years

Dividends paid = $6.31

Holding Period Return = (Selling price - Buying price + Dividend) / Buying price

Holding Period Return = ($125.48 - $123.61 + $6.31 ) / $123.61

Holding Period Return = $8.18 / $123.61 = 0.0661758 = 6.6176%

Effective annual rate will be = [ ( 1 + HPR )^{1 / n} ] - 1

where HPR = Holding Period Return n = number of years = 4/12 = 0.3333 years

Effective annual rate = [ ( 1 + 0.0661758 )^{1 / 0.3333} ] - 1

Effective annual rate = [ ( 1 + 0.0661758 )^{1 / 0.3333} ] - 1

Effective annual rate = [ ( 1.0661758 )^{1 / 0.3333} ] - 1

Effective annual rate = 1.211955 - 1 = 0.211955 = 21.20%

Tom’s effective annual rate is 21.20%