Question

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

Answer 1

Answer:

a) Total gross return = 459.3%

b) Average annual return = $4,195

Explanation:

Let's begin by listing out the information given us:

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

dividend = 7 cents = $0.07 per share per year,

time = 4 years, sale price = $16.50 per share,

brokerage commission = 4%

Cost of shares purchased = number of shares * purchase price

Cost = 1000 * 3 = 3,000

Cost = $3,000

I purchased shares worth $3,000 on January 1, 2006

Total dividend received = dividend * number of shares * time

Total dividend = 0.07 * 1000 * 4 = $280

Over the course of 4 years, I received $280 in dividend

Price of share sale = number of shares * sale price

Price of share sale = 1000 * 16.50 = $16,500

brokerage commission = 4% of Price of share sale

brokerage commission = 0.04 * 16500 = $660

a) Total gross return = (dividend + price of share sale - cost of shares purchased) ÷ cost of shares purchased

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 means the investment made a profit of over 400% (four times the amount spent in purchasing the shares)

N.B: Total gross return does not include fees and expenses such as brokerage costs

b) Average annual return = Returns during the specified period ÷ time

Returns during the specified period = dividend + price of share sale = 280 + 16500 = $16,780

Average annual return = 16780 ÷ 4 = 4195

Average annual return = $4,195