Question

Question: Mr. Dow bought 100 shares of stock at $14pershare.Threeyearslater,hesoldthestockfor$20 per share. What is his annual rate of return?

Short answer

Answer

The annual rate of return is 12.62%.

Step-by-step solution

Computation of present value of shares (PV)

$$\begin{gathered} \text{PV=No.ofshares×Purchasepricepershare} \\ =100\times \$14 \\ =\$1400 \end{gathered}$$

Computation of value of shares after 3 years (FV)

$$\begin{gathered} \text{PV=No.ofshares×Purchasepricepershare} \\ =100\times \$20 \\ =\$2000 \end{gathered}$$

Identification of the required information

Present value (PV) = $1,400

Periods (n) = 3

Future value (PV) = $2,000

Computing the annual rate of return (i)

$$\begin{gathered} \text{FV=PV×}{\left(1+I\right)}^n \\ 2000=1400\times {\left(1+I\right)}^3 \\ i=\$12.62\% \end{gathered}$$