Certified Trust and Financial Advisor (CTFA) Exam | Rate of Return Calculation

Rate of Return Calculation

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Question

A person purchased a share of Acme.com common stock exactly one year ago for $45. During the past year the common stock paid an annual dividend of $2.40.

The person sold the security today for $85. What is the rate of return the firm has earned?

Answers

Explanations

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A. B. C. D.

D

To calculate the rate of return earned on the Acme.com common stock, we need to use the following formula:

Rate of Return = (Ending Value - Beginning Value + Income) / Beginning Value

Where:

  • Ending Value: the value of the investment at the end of the holding period
  • Beginning Value: the value of the investment at the beginning of the holding period
  • Income: the income received during the holding period

Using the information given in the question, we can fill in the formula as follows:

  • Ending Value = $85 (the sale price of the stock)
  • Beginning Value = $45 (the purchase price of the stock)
  • Income = $2.40 (the dividend paid during the holding period)

So the rate of return is:

Rate of Return = ($85 - $45 + $2.40) / $45 Rate of Return = $42.40 / $45 Rate of Return = 0.9422 or 94.22%

Therefore, the answer is (D) 94.2%.

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