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balu736
2 months ago
13

You purchased 1000 shares of stock in Cumberland Software for $3 per share on January 1, 2006. Over the next four years, you rec

eived 7 cents per share annually in dividends. On December 31, 2009, you sell all your shares of Cumberland Software for $16.50 per share. Brokerage commissions are 4% of the total transaction value when buying and selling.
a. What has been your total gross return (in percent) over the four years?
b. What has been your average annual return over the four years?
Business
1 answer:
marusya05 [3.7K]2 months ago
3 0

Answer:

a) Total gross return = 459.3%

b) Average annual return = $4,195

Explanation:

First, let's summarize the given data:

Number of shares = 1000, purchase price = $3 per share,

annual dividend = 7 cents = $0.07 for each share per year,

duration = 4 years, selling price = $16.50 per share,

brokerage fee = 4%

Calculation of total costs for shares = number of shares * purchase price

Cost = 1000 * 3 = 3,000

Cost = $3,000

On January 1, 2006, I acquired shares valued at $3,000

Calculation of total dividends received = dividend * number of shares * time

Total dividends = 0.07 * 1000 * 4 = $280

In four years, I received $280 from dividends

Total revenue from sale = number of shares * selling price

Total sale price = 1000 * 16.50 = $16,500

Brokerage fee = 4% of total sale

Brokerage fee = 0.04 * 16500 = $660

a) Total gross return calculation = (dividend + revenue from sale - purchase cost) ÷ purchase cost

Total gross return = (280 + 16500 - 3000) ÷ 3000

Total gross return = 13780 ÷ 3000 = 4.593

Total gross return = 4.593 * 100%

Total gross return = 459.3%

This indicates a gain exceeding 400% (four times the investment in acquiring the shares)

Note: Total gross return does not factor in any fees or expenses such as brokerage charges

b) Average annual return = Total returns during the specified timeframe ÷ duration

Total returns during the specified timeframe = dividend + total sale revenue = 280 + 16500 = $16,780

Average annual return = 16780 ÷ 4 = 4195

Average annual return = $4,195

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