On January 1, 20X1, Jennifer purchases common stock of Gamma Corporation for $100,000. During the year, Gamma Corporation stock pays a dividend of $3,000. At the end of the year, Jennifer sells the Gamma stock for $104,000. What is the return on investment of the Gamma stock?

7%

Explanation:

Return on investment (ROI) is a very popular and simple profitability ratio used by financial and business analyst to test the profitability or otherwise of an investment. It is always calculated by dividing the net income by the Cost of Investment, expressed as a percentage.

ROI = (Net Income / Cost of Investment) x 100%

Net Income = Capital gain + dividend received

Capital gain = Sales of stock - Cost of stock

= $104,000 - $100,000 = $4,000

Dividend = $3,000

Net Income = $4,000 + $3,000 = $7,000

Cost of Investment = $100,000

ROI = ($7,000 / $100,000) x 100%

ROI = (0.07) x 100%

ROI = 7%

Therefore, the return on investment of the Gamma stock is 7%.