Tom purchased 100 shares of EDS at $34 and sold it for $41 two years later. If EDS paid a $.15/share dividend over the eight quarters of investment, what was the annualized annual rate of return that Tom earned on the investment?
A) 2.78%
B) 22.2%
C) 24%
D) 9.8%

Question

Quizplus · Accepted Answer

Tom's total profit from the sale is $(41 - 34) * 100 = $700. The total dividend income is $.15 * 8 * 100 = $120. The total return is $700 + $120 = $820. The initial investment was $34 * 100 = $3400. The annualized rate of return is calculated using the formula for compound annual growth rate (CAGR): $$CAGR = \left(\frac{Final Value}{Initial Value}\right)^{\frac{1}{Number of Years}} - 1$$ Substituting the values: $$CAGR = \left(\frac{3400 + 820}{3400}\right)^{\frac{1}{2}} - 1 = \left(\frac{4220}{3400}\right)^{\frac{1}{2}} - 1 \approx 0.222$$ or 22.2%.

Tom Purchased 100 Shares of EDS at $34 and Sold