Ivonne has bought shares of RIO, Inc. for $25.00 per share. She expects a $1.00 dividend at the end of this year. After 2 years, she expects to receive a dividend of $1.25 and to sell the share for $28.75. What is Ivonne's required rate of return?

Question

Quizplus · Accepted Answer

Ivonne's required rate of return can be calculated using the formula for the internal rate of return (IRR) for the cash flows: -25 (initial investment), +1 (dividend at end of year 1), +1.25 (dividend at end of year 2), and +28.75 (sale price at end of year 2). Solving for IRR gives approximately 11.6%.

Ivonne Has Bought Shares of RIO, Inc