Question

use a financial calculator or a program such as Excel to answer the questions run your answers to the nearest whole number.

A. you purchase a stock for $9,500 and collect $350 at the end of each year in dividends. you sell the stock for $11,000 after 6 years what was the annual return on your $9, 500 investment?

B. You purchased a building for a $750,000 collect annual rent (after expenses) of $110,000 and sell the building for $800,000 after 4 years. what is the annual return on this investment?.

C. you buy a stock for $1,000 and expect to sell it for $940 after 6 years but also expect to collect dividends of $130 a year. calculate the return on this investment and prove that it is less than 14%.

Answer 1

A]

Cash outflow at Year = purchase price =  9500

Cash inflow in Years 1 to 5 = dividend = 350

Cash inflow in Year 6 = dividend + sale price = 350 + 11000 = 11350

Annual return is calculated using IRR function in Excel

IRR = 5.95%

B]

Cash outflow at Year = purchase price =  750,000

Cash inflow in Years 1 to 3 = rent = 110,000

Cash inflow in Year 4 = rent + sale price = 110,000 + 800,000 = 910,000

Annual return is calculated using IRR function in Excel

IRR = 15.98%

C]

Cash outflow at Year = purchase price =  1000

Cash inflow in Years 1 to 5 = dividend =  130

Cash inflow in Year 6 = dividend + sale price = 130 + 940 = 1070

Annual return is calculated using IRR function in Excel

IRR = 12.27%. Hence, it is less than 14%