Common stock is held for two years, during which time it receives an annual dividend of $10.The stock was sold for $100 and generated an average annual return of 16 percent.What price was paid for the stock?
A)$61.60
B)$64.80
C)$88.00
D)$90.91

Question

Quizplus · Accepted Answer

The price paid for the stock can be calculated using the formula for the average annual return, which is given by $(\frac{P_{final} + D - P_{initial}}{P_{initial}}) \times 100 = Average\ Annual\ Return$, where $P_{final}$ is the final price of the stock, $D$ is the total dividends received, and $P_{initial}$ is the initial price paid for the stock. Rearranging the formula to solve for $P_{initial}$, and substituting the given values ($P_{final} = $100$, $D = 2 \times $10 = $20$, and the average annual return = 16%), we can solve for $P_{initial}$. This calculation results in $P_{initial} = $90.91$.

Common Stock Is Held for Two Years, During Which Time