Future Business Leaders of America (FBLA) Business Calculations Practice Test

Your stock costs $100 and it pays $1 per quarter. What is the rate of return?

1. A. 1%

2. B. 4%

3. C. 0.4%

4. D. 0.23%

The correct answer is: B. 4%

To determine the rate of return on the stock, you need to consider both the price of the stock and the dividends it pays. The stock costs $100, and it pays a dividend of $1 per quarter. Since there are four quarters in a year, this equates to an annual dividend payment of $4. The rate of return is calculated by taking the annual dividend payment and dividing it by the price of the stock, then multiplying by 100 to express it as a percentage. So the calculation would be: Annual dividend = $1 (quarterly dividend) * 4 (quarters) = $4 Now, we calculate the rate of return: Rate of return = (Annual dividend / Price of the stock) * 100 Rate of return = ($4 / $100) * 100 = 4% This result indicates that for every dollar invested in the stock, the investor receives a return of 4% in dividends. This is a straightforward way to evaluate the profitability of an investment in terms of cash flow provided by dividends relative to the investment cost. Understanding this helps reinforce the concept of how to evaluate stock investments based on dividend returns, which is crucial for making informed financial decisions.