Question

You are considering the purchase of a certain stock. You expect to own the stock for the next four years. The current market price of the stock is $24.50 and you expect to sell it for $55 in four years. You also expect the stock to pay an annual dividend of $1.25 at the end of year 1, $1.35 at the end of year 2, $1.45 at the end of year 3 and $1.55 at the end of year 4. What is your expected return from this investment?

a.21.78 percent
b.18.36 percent
c.32.85 percent
d.26.68 percent
e.None of these choices are correct.

Answer 1

I think the correct choice would be B

Answer 2

18.36% (B)

Step-by-step explanation:

Current market price of stock = $24.50

Amount to be sold after four years = $55

Total dividend generated for four years= sum total of individual dividend each year.

= $1.25+$1.35+$1.45+$1.55

= $5.60

%ROI = Dividend/Return × 100%

Return = Amount generated after four years - initial stock price

Return = $55-$24.50

Return = $30.50

%ROI = $5.6/$30.50 × 100

%ROI = 0.1836 × 100

%ROI = 18.36%