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Chapter 4: 4-9-33BP (page 284)

Question: Mr. Dow bought 100 shares of stock at \(14 per share. Three years later, he sold the stock for \)20 per share. What is his annual rate of return?

Short Answer

Expert verified

Answer

The annual rate of return is 12.62%.

Step by step solution

01

Computation of present value of shares (PV)

PV=No.ofshares×Purchasepricepershare=100×$14=$1400

02

Computation of value of shares after 3 years (FV)

PV=No.ofshares×Purchasepricepershare=100×$20=$2000

03

Identification of the required information

Present value (PV) = $1,400

Periods (n) = 3

Future value (PV) = $2,000

04

Computing the annual rate of return (i)

FV=PV×1+In2000=1400×1+I3i=$12.62%

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