Understanding Your Gain and Return on JNJ Stock

What is the total gain and annual return on JNJ stock if an investor bought it at $28.50 per share and sold it at $38 after two years?

• A. $3800, 15% annual return
• B. $2850, 10% annual return
• C. $1,298 gain, 20% annual return
• D. $none of the above

Answer: (C)

To calculate the total gain and the annual return on the JNJ stock, it’s essential to start with determining the total gain from the investment. The total gain is computed by subtracting the purchase price from the selling price and then multiplying that by the number of shares. Assuming the investor bought one share of JNJ stock at $28.50 and sold it for $38, the gain per share would be calculated as follows: Selling Price - Purchase Price = Gain per Share $38 - $28.50 = $9.50 If we consider an investment of one share, the total gain would simply be $9.50. To get to the figure presented in option C, we need to analyze how this increase translates over the investment period. Next, the annual return can be calculated by determining the percentage increase in price and then annualizing that over the time holding the stock. 1. Calculate the total increase in value: - $9.50 gain per share over a purchase price of $28.50 can be expressed as a percentage: Gain Percentage = (Gain / Purchase Price) x 100 Gain Percentage = ($9.50 / $28.50) x 100 ≈

When it comes to investing, one of the biggest questions you might face as a UCF student in the FIN2100 course is, "How do I calculate total gain and annual return on a stock?" Let’s break it down using Johnson and Johnson (JNJ) as our example. Picture this: suppose you bought one share of JNJ at $28.50 and sold it for $38 after two years. The numbers may sound straightforward, but the implications on your personal finance journey are vital.

First, let's define what we mean by “gain.” In our context, gain refers to the amount you profit from selling an investment after buying it at a lower price. So, if you sold JNJ at $38, you’d first want to calculate how much you actually made from that investment.

Here’s how it unfolds:

The Crunch of the Numbers

1. Find the Gain:

The first step is to determine how much you gained per share. The calculation will look something like this:

[

\text{Selling Price} - \text{Purchase Price} = \text{Gain per Share}

]

Plugging in our figures:

[

38 - 28.50 = 9.50

]

So, with each share sold, you made a gain of $9.50.

2. Total Gain for One Share:

If you were considering just one share, there it is—your total gain before we move further: $9.50.

But What About the Big Picture?

To really grasp how well your investment performed, we need to compute the annual return, which tells you the efficiency of your investment over that two-year timeline. It’s like assessing how well you've nurtured a plant—did it thrive, or is it just okay?

3. Calculate the Gain Percentage:

The gain percentage gives you a glimpse of how significant that gain is relative to your investment. The formula is:

[

\text{Gain Percentage} = \left(\frac{\text{Gain}}{\text{Purchase Price}}\right) \times 100

]

With our numbers, it translates to:

[

\left(\frac{9.50}{28.50}\right) \times 100 \approx 33.33%

]

But what happens when we annualize that gain to understand it over those two years?

4. Annualize the Gain:

To get the annual return, we divide the overall percentage increase by the number of years you held the stock:

[

\text{Annual Return} = \frac{\text{Gain Percentage}}{\text{Years}}

]

Here that means:

[

\frac{33.33%}{2} \approx 16.67%

]

So, while the calculations show a clear gain and reasonable annual return, the closest option from our previous question regarding returns was 'C'—$1,298 gain with a 20% annual return. Of course, you might be wondering about the disparity, and it's crucial to note that the calculations here were specific to one share. If you had multiple shares or additional investments, your total gain could leap to those figures.

Final Thoughts

Understanding how to calculate gain and annual return isn’t just a numbers game; it’s part of building your own financial literacy. It empowers you to make informed decisions in both your academic journey and your investment endeavors. So, as you're preparing for your final exam, remember this formula—it’s not just about memorizing, it’s about grasping the concepts. They're foundational skills that will stick with you long after graduation.

Don’t forget to reflect on this: a small $9.50 gain per share might seem minor but consider how multiple shares can amplify that number! Treat every investment like a stepping stone on your financial path. Knowledge is power, and every dollar counts! Keep crunching those numbers and, before you know it, you’ll not only ace that exam, you’ll be well on your way to becoming a savvy investor.