Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011)
At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. What was his average annual rate of return form both dividends and capital gains? (Hint: compute the IRR, assume that all dividends were received at the end of the year.)
What will be an ideal response?
Answer: Josh's cash flows on a per share basis were as follows:
PV at 4.076%
2007 (beginning) -$76.63 -76.63
2007 (end) 1.37 1.32
2008 (end) 1.55 1.43
2009 (end) 1.66 1.47
2010 (end) 1.74 1.48
2011 (end) 1.85 + 84.76 70.93
Total 00.00
Josh has earned 4.076% on his investment in XOM. The solution involves finding the internal rate of return for all cash flows. The discount rate of 4.076%, which equates the present value of dividends and the 2011 price to the 2007 price can be found by trial and error or more efficiently using a financial calculator. Because the internal rate of return is a percentage, it does not matter whether you use the cash flows for 100 shares or a single share.
You might also like to view...
The world's newest common market includes all of the following countries except:
A) Kenya B) Tanzania C) Rwanda D) Nigeria E) Burundi
When motivating using equity theory, managers should be aware that it is based on ______.
a. values b. beliefs c. attitudes d. perceptions
All of the following statements concerning opportunity assessment plans are correct except:
A. an opportunity assessment plan has four sections-two major sections and two minor sections. B. the first major section of the opportunity assessment plan develops a time line indicating what steps need to be take to successfully launch the venture. C. the second major section of the opportunity assessment plan focuses on the market. D. an opportunity assessment plan is not a business plan.
The FDA can order sellers of ineffective products to provide purchasers with effective
substitutes. Indicate whether the statement is true or false