The stock that Mr. Ames bought cost him $80 a share. The par value of the stock is $100. If the stock pays $6 a year in dividends, what rate of interest is Mr. Ames getting on his money?
A.16 2/3%
B.7 1/2%
C.3%
D.6%
E.None of the above
Personally, what made the problem confusing is of the "par value"....But please answer if you had any thoughts and comments!
Here are some explanations of par value.
https://www.google.com/#q=par+value+of+the+stock
Note that most stocks don't have a par value. Is your question way out of date?
How about this solution?
100 (6/80) = _______%
He bought it for $80
As far ads I know the "par value" is of only academic interest.
100 * 6/80 = 7.5 %
To find the rate of interest Mr. Ames is getting on his money, we can use the dividend payment and the cost of the stock.
The rate of interest can be calculated by dividing the annual dividend payment by the cost of the stock and multiplying by 100 to get the percentage.
In this case, Mr. Ames paid $80 for a stock that has a par value of $100 and pays $6 in dividends per year.
Dividend Payment = $6
Cost of Stock = $80
Rate of Interest = (Dividend Payment / Cost of Stock) * 100
Rate of Interest = ($6 / $80) * 100
Rate of Interest = 0.075 * 100
Rate of Interest = 7.5%
So, Mr. Ames is getting a rate of interest of 7.5% on his money.
However, none of the given answer choices match this result exactly. The closest answer choice is B. 7 1/2%, which is equivalent to 7.5%.
The term "par value" refers to the nominal or face value of a stock, typically stated on the stock certificate. In this case, it tells us that the stock is initially valued at $100, but Mr. Ames bought it at a lower price.