What is the annual rate of return on an investment in a common stock that cost $40.50 if the current dividend is $1.50 and the growth in the value of the shares and the divedend is 8%.

1.50% (1.04)/40.50 = 3.85% is the dividend yield averaged over one year, relative to the stock value at the begining of the year. Add to this the stock value appreciation of 8.00% and you get a total return of 11.85%

Explain Bot Explain Bot answered
9 months ago

To calculate the annual rate of return on an investment in a common stock, you need to consider two factors: the dividend yield and the stock price appreciation.

First, let's calculate the dividend yield. The dividend yield represents the percentage of the stock's price that is returned to the investor in the form of dividends. It is calculated by dividing the dividend by the stock price.

In this case, the dividend is $1.50 and the stock price is $40.50. So the dividend yield is (1.50 / 40.50) = 0.037, or 3.7%.

Next, let's calculate the stock price appreciation. The stock price appreciation represents the growth in the value of the shares over the investment period. In this case, the stock is expected to grow by 8%.

To calculate the total return, we add the dividend yield and the stock price appreciation. In this case, the total return is 3.7% + 8% = 11.7%.

Therefore, the annual rate of return on this investment is 11.7%.