You purchased 1000 shares of stock in Cumberland Software for $3 per share on Ja

Question

You purchased 1000 shares of stock in Cumberland Software for $3 per share on January 1, 2006. Over the next four years you received 7 cents per share annually in dividends. On December 31, 2009 you sell all your shares of Cumberland Software for $16.50 per share. Brokerage commissions are 4% of the total transaction value when buying and selling. (1) What has been your total gross return (in percent) over the four years? (2) What has been your average annual return over the four years?

You purchased 1000 shares of stock in Cumberland Software for $3 per share on January 1, 2006. Over the next four years you received 7 cents per share annually in dividends.On December 31, 2009 you sell all your shares of Cumberland Software for $16.50 per share. Brokerage commissions are 4% of the total transaction value when buying and selling. Now, determine your net return (after taxes and inflation) on Cumberland Software. Assume a marginal tax rate of 31% and a rate of inflation over the four year period of 3.75% per year. (A 31% marginal tax bracket consumer would be taxed 15% for both dividends and capital gains.)

Explanation / Answer

Stocks of Cmberland :

Purchased 1000 shares at $ 3 per share   

cost price= 1000*$ 3=$ 3000

dividends for 4 years at the rate of $ 0.07 cents per share =1000*0.07*4 = $ 280

selling price of 1000 shares @ 16.50 per share = 1000*$ 16.50=$ 16500

Profi on sale of 1000 shares =$ 16500-$ 3000=$ 13500

total gross return = profit on sale of shares+ dividends = $ 13500+$ 280= $ 13,780

net profit == profit - commissions ( 8%) $ 13500- $ 1080 =$ 12420

Net return= ( after tax and inflation)

note : as said in the problem that a31% marginal tax bracket consumer wuold be taxed 15% for both dividends and capital gain

total gain = dividends + capital gain= $ 13500+$ 280=$ 13780

gain after tax=$ 13780-15%=$ 2067

13780-2067= $ 11713

inflation $ 11713*3.75%=$ 439.24

so net profit = $ 11713-$ 439.24 =$ 11273.76

gross return = $ 13780/3000*100 =459.33%

average annual reurn= $ 13780/4 =$ 3445

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