You are considering the purchase of a certain stock. You expect to own the stock for the next four years. The current market price of the stock is $24.50 and you expect to sell it for $55 in four years. You also expect the stock to pay an annual dividend of $1.25 at the end of year 1, $1.35 at the end of year 2, $1.45 at the end of year 3 and $1.55 at the end of year 4. What is your expected return from this investment?

Question

Tyrese Bradford

Business

27 February, 07:59

You are considering the purchase of a certain stock. You expect to own the stock for the next four years. The current market price of the stock is $24.50 and you expect to sell it for $55 in four years. You also expect the stock to pay an annual dividend of $1.25 at the end of year 1, $1.35 at the end of year 2, $1.45 at the end of year 3 and $1.55 at the end of year 4. What is your expected return from this investment?

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Answers (1)

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Angeline Nichols · Answer 1

The answer is: The expected rate of return from this investment is 26.68%

Explanation:

We are given the following cash flows for this operation:

Initial investment = - $24.50 Cash flow 1 = $1.25 (dividend year 1) Cash flow 2 = $1.35 (dividend year 2) Cash flow 3 = $1.45 (dividend year 3) Cash flow 4 = $56.55 ($1.55 dividend year 4 + $55 stock's sales price)

Using an excel spreadsheet and the IRR function:

=IRR (value 1: value 5) = 26.68%

where

value 1 = - 24.50 value 2 = 1.25 value 3 = 1.35 value 4 = 1.45 value 5 = 56.55