Nellie has been researching the stock price of TechNoMagic, Inc. and has noticed

Question

Nellie has been researching the stock price of TechNoMagic, Inc. and has noticed that if follows a consistent cyclical pattern in the last few years.  Each year it is at its lowest toward the end of the 2nd quarter and peaks towards the end of the 4th quarter.  What annual rate of return (EAR) could Nellie potentially earn if she purchased 150 shares at  the end of quarter 2 for $78 per share and sell it at the end of quarter 4 for $87 per share, and she also received $1 per share of quarterly dividends.  Ignore any fees for trading the stock and any re-investment of the dividends when paid or funds after selling .

.

Explanation / Answer

Dividend earned in one quarter = 150*1= 150

Dividend earned in two quarters= 150*2= 300

Amount received in the final sale = 150*87 =$13050

Amount invested = 150*78 =$11700

Total rate of return = (Final amount+ Dividend- Initial amount)Initial amount

Total gain =150*87+300-150*78= 1650

rate of return = (13050+300-11700)/11700 = 14.10%

This rate of return was earned for six months

annual rate of return (EAR) =(1+14.10)^2 -1 = 30.19%

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.