Question

eBook Problem 7-31 Use a financial calculator or a program such as Excel to answer the questions. Round your answers to the nearest whole number. You purchase a stock for $9,000 and collect $300 at the end of each year in dividends. You sell the stock for $10,500 after five years. What was the annual return on your $9,000 investment?   % You purchase a building for $850,000, collect annual rent (after expenses) of $110,000, and sell the building for $950,000 after seven years. What is the annual return on this investment?   % You buy a stock for $1,000 and expect to sell it for $850 after five years but also expect to collect dividends of $130 a year. Calculate the return on this investment and prove that it is less than 13 percent.   %

Answer 1

a) Answer- The annual return on $9,000 investment is 6%

Particulars	Value
Initial Stock Price	$9,000
Capital Appreciation	$1,500*
Dividend for 5 year[$300*5)	$1,500
No. of Years	5

* Capital appreciation=$10,500-$9,000=$1,500

Ending Value = Initial Value + Capital Appreciation + Dividends Earned=$9,000+$1,500+$1,500=$12,000

Annual Return is calculated using the formula given below

Annual Return = [(Ending Value / Initial Value) ^(1 / No. of Years)] - 1

Annual Return=[($12,000/$9,000)^(1/5)]-1=5.9% or 6%(approx).

b) Answer- The annual return on this investment is 11%

Particulars	Value
Initial Price of Building	$850,000
Capital appreciation[Selling price-Initial price]	$100,000*
Rent for 7 years[$110,000*7)	$770,000
No. of Years	7

* Capital appreciation=$9,50,000-$8,50,000=$1,00,000

Ending Value = Initial Value + Capital Appreciation + Rent=$850,000+$100,000+$770,000=$1,720,000

Annual Return is calculated using the formula given below

Annual Return = [(Ending Value / Initial Value) ^(1 / No. of Years)] - 1

Annual Return=[($1,720,000/$850,000)^(1/7)]-1=10.6% or 11%(approx).

c) The return on investment is 8% & hence less than 13%

Particulars	Value
Initial Stock Price	$1,000
Capital Appreciation[Selling price-Initial price]	($150)*
Dividend for 5 year[$130*5)	$650
No. of Years	5

* Capital appreciation=$850-$1,000=($150)

Ending Value = Initial Value + Capital Appreciation + Dividends Earned=$1,000-$150+$650=$1,500

Annual Return is calculated using the formula given below

Annual Return = [(Ending Value / Initial Value) ^(1 / No. of Years)] - 1

Annual Return=[($1,500/$1,000)^(1/5)]-1=8.4% or 8%(approx).