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Question:
An investor purchases 500 shares of Nevada Industries common stock for $22.00 per share today. At t = 1 year, this investor receives a $0.42 per share dividend (which is not reinvested) on the 500 shares and purchases an additional 500 shares for $24.75 per share. At t = 2 years, he receives another $0.42 (not reinvested) per share dividend on 1,000 shares and purchases 600 more shares for $31.25 per share. At t = 3 years, he sells 1,000 of the shares for $35.50 per share and the remaining 600 shares at $36.00 per share, but receives no dividends. Assuming no commissions or taxes, the money-weighted rate of return received on this investment is closest to:
A
18.5%.
explanation
To find the money-weighted rate of return, equate the present value of inflows to the present value of outflows and find the discount rate that makes them equal.
t=0 : buy 500 share $22 = -$11.000
t=1 : $0.42 x 500 share = +$210 , buy 500 share $24.75=-$12.375 , net cash flow=-$18.330
t=3 : Sell 1.000 share $35.50= +35.500 , sell 600 share $36.00=21.600 , net cash flow=+$57.000
Find the IRR with CFs as follows:
CF0 = -11,000; CF1 = -12,165; CF2 = -18,330; CF3 = 57,100
The final result is IRR = 18.49%.
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