? Assume that dividends will not grow for the next 5 years. If you buy a share o

Question

? Assume that dividends will not grow for the next 5 years. If you buy a share of Questar at the current price (number 1), receive the current dividend (number 2) for each of the next 5 years, then sell the stock for the price found in (f), what will be your dollar-weighted average annual rate of return (Calculate IRR using P0, D1-D5 and P5)?

1) The closing price for Questars common stock on Friday 11/22/13 = $22.69

2) Questars annual dividend, projected for next year = $.72

3) The current analysts average estimate for Questars EPS for this year (Dec. 13) = $1.20

4) The current analysts average estimate for next years EPS (Dec. 14) = $1.29

5) The current analysts average estimate of Questars 5-yr EPS growth = 3.85%

The stock price I got for (f) is $23.34 Please show work, Thanks!

Explanation / Answer

WORKING NOTE:-

LET IRR = 4%

WE GET

R.H.S = 0.72*4.4518 + 23.34*0.8219

=22.39

NOW LET IRR = 3%

WE GET RHS

=0.72*4.5797 + 23.34*0.8626

= 23.43

USING INTERPOLATION WE GET

(IRR-3)/(4-3)   = (22.69-23.43)/(22.39-23.43)

IRR-3 = 0.74/1.04     [NEGATIVE SIGNS GETS CANCELLED]

IRR-3 = 0.71

IRR = 3 + 0.71

IRR = 3.71%

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