Scott purchased 200 shares of Frozen Foods stock for $48 a share. Four months later, he received a dividend of $.22 a share and also sold the shares for $42 each. What was his annualized rate of return on this investment?

Question

Quizplus · Accepted Answer

First, let’s calculate the total initial investment:
200 shares x $48/share = $9,600

Next, let’s calculate the cash inflows:
Dividend = 200 shares x $.22/share = $44
Sale of shares = 200 shares x $42/share = $8,400

Total cash inflows = $44 + $8,400 = $8,444

Now, let’s calculate the holding period:
Four months is equivalent to 1/3 of a year (since there are 12 months in a year).

Annualized rate of return = ((Total cash inflows/Total investment) + 1)^(1/Holding period) - 1

Annualized rate of return = (($8,444/$9,600) + 1)^(1/(1/3)) - 1 = -0.3195 or -31.95% (rounded to two decimal places)

Therefore, the answer is D)−31.95%.

Scott Purchased 200 Shares of Frozen Foods Stock for $48