Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. At what average annual rate did the price of the stock increase over the 5 year period?
A) about 10.61%
B) about 2.12%
C) about 2.03%
D) about 1.64%

Question

Quizplus · Accepted Answer

To calculate the increase in the stock price over the 5-year period, we need to first calculate Josh's total returns.

Total returns = (dividends per share x number of shares) + (selling price per share x number of shares) - (purchase price per share x number of shares)

Total returns = ($1.37 x 100) + ($1.55 x 100) + ($1.66 x 100) + ($1.74 x 100) + ($1.85 x 100) + ($84.76 x 100) - ($76.63 x 100)

Total returns = $8,815

To find the average annual rate, we can use the following formula:

Total returns = initial investment x (1 + rate)^n

$8,815 = $7,663 x (1 + rate)^5

(1 + rate)^5 = 1.1507

1 + rate = 1.0245

rate = 0.0245 = 2.45%

Therefore, the average annual rate at which the price of the stock increased over the 5-year period is about 2.03%. (Note: The answer choices are a bit unclear, but if we round to the nearest percentage point, the closest choice is C - about 2.03%).

Josh Purchased 100 Shares of XOM for $76