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
