Owen has been researching the stock price of TechNoMagic, Inc. and has noticed t
ID: 2774173 • Letter: O
Question
Owen has been researching the stock price of TechNoMagic, Inc. and has noticed that it 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 Owen potentially earn if he purchased 100 shares at the end of quarter 2 for $87 per share and sold it at the end of quarter 4 for $98 per share, and he also receives quarterly dividends of $1 per share. Ignore any fees for trading the stock. Owen has been researching the stock price of TechNoMagic, Inc. and has noticed that it 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 Owen potentially earn if he purchased 100 shares at the end of quarter 2 for $87 per share and sold it at the end of quarter 4 for $98 per share, and he also receives quarterly dividends of $1 per share. Ignore any fees for trading the stock.Explanation / Answer
Return on investment = [Number of shares (Selling price -purchase price +dividend ) ] /[Number of shares *purchase price]
= [100 (98 -87 + 1 ) ] / [100 * 87]
= 100 * 12 / 8700
= 1200 / 8700
= 13.79%
Since 13.79 % is return for 2 quarters (Total 4 quarters in a year) ,annual return = 13.79 * 4/2
= 27.58%
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