Year Stock Price Annual Dividends 1-Feb-10 35 1-Feb-11 40 0.2 1-Feb-12 30 0.4 1-
ID: 2646251 • Letter: Y
Question
Year
Stock Price
Annual Dividends
1-Feb-10
35
1-Feb-11
40
0.2
1-Feb-12
30
0.4
1-Feb-13
130
0.5
1-Feb-14
65
0.7
Suppose that you invested $2,000 dollars using the dollar-cost-averaging approach. Assume that on Feb-1-10, and on Feb-1-11, you purchased $1,000 worth of stock (each year). You then held the shares until they were sold on Feb-1-2014 (assume you received the dividend in all these years and dividends were reinvested). What is the ROI on your investment over the holding period (4 years)? _______________ Hint: create a spreadsheet of your cash flows and solve for the IRR. Note: you only get the 20 cent dividend in 2011 on the shares purchased in 2010. Assume that you get the 70 cent dividend on shares purchased in 2014 just before you sold those shares.
Year
Stock Price
Annual Dividends
1-Feb-10
35
1-Feb-11
40
0.2
1-Feb-12
30
0.4
1-Feb-13
130
0.5
1-Feb-14
65
0.7
Explanation / Answer
Using the formula for IRR in excel, [just need to use =IRR(G1:G6) where G1:G6 is the data range for present values], IRR = 18.1127%
Year Date Outflow on Purchase / Sale of shares Expanation Dividend Expanation Net Outflow 0 01-Feb-10 -35000 1000 shares @ $35 per share 0 No dividend received -35000 1 01-Feb-11 -40000 1000 shares @ $40 per share 200 Dividend received @0.20 per share for shares purchased in 2010 = 1000*0.20 = 200 -39800 2 01-Feb-12 0 800 Dividend received @0.40 per share for shares purchased in 2010 & 2011 = 2000*0.40 = 800 800 3 01-Feb-13 0 1000 Dividend received @0.50 per share for shares purchased in 2010 & 2011 = 2000*0.50 = 1000 1000 4 01-Feb-14 130000 1400 Dividend received @0.50 per share for shares purchased in 2010 & 2011 = 2000*0.70 = 1400 131400Related Questions
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