Tracey is contemplating the purchase of 100 shares of a stock selling for 15 per share. The stock pays no dividends. Her broker says that the stock will be worth 20 per share in 2 years. What is the annual rate of return on this investment?
To find the annual rate of return on this investment, we need to calculate the percentage increase in value over the two-year period.
First, let's calculate the initial cost of purchasing 100 shares at $15 per share:
Initial Cost = Number of shares × Purchase price per share
Initial Cost = 100 × $15 = $1500
Next, let's calculate the future value of the investment after 2 years:
Future Value = Number of shares × Future price per share
Future Value = 100 × $20 = $2000
To find the rate of return, we use the formula:
Rate of Return = ((Future Value - Initial Cost) / Initial Cost) × 100
Substituting the values, we get:
Rate of Return = (($2000 - $1500) / $1500) × 100
Rate of Return = ($500 / $1500) × 100
Rate of Return ≈ 33.33%
Therefore, the annual rate of return on this investment is approximately 33.33%.