Early in 2019, Maria bought shares of MBA Inc. at $27.85 per share. She received the following dividends per share (end of year). $$\begin{array} { l l }
2019 & \$ 1.50 \
2020 & \$ 2.00 \
2021 & \$ 2.50
\end{array}$$ Immediately after receiving the 2021 dividend, she sold the stock for $32.50 per share. Her internal rate of return on this investment was

Question

Early in 2019, Maria bought shares of MBA Inc. at $27.85 per share. She received the following dividends per share (end of year). $$\begin{array} { l l } 
2019 & \$ 1.50 \
2020 & \$ 2.00 \
2021 & \$ 2.50
\end{array}$$ Immediately after receiving the 2021 dividend, she sold the stock for $32.50 per share. Her internal rate of return on this investment was

Quizplus · Accepted Answer

The internal rate of return (IRR) is the rate that makes the net present value (NPV) of all cash flows from a particular investment equal to zero. In this case, Maria's cash flows can be represented as follows: an initial outflow of $27.85 when she buys the stock, inflows of $1.50, $2.00, and $2.50 for the dividends received at the end of 2019, 2020, and 2021 respectively, and finally an inflow of $32.50 when she sells the stock immediately after receiving the 2021 dividend. The IRR is the rate $r$ that satisfies the equation:$$-27.85 + \frac{1.50}{(1+r)} + \frac{2.00}{(1+r)^2} + \frac{2.50 + 32.50}{(1+r)^3} = 0$$Solving this equation for $r$ gives an IRR of approximately 11.99%, which corresponds to option C.

Early in 2019, Maria Bought Shares of MBA Inc 2019$1.502020$2.002021$2.50\begin{array} { l l } 2019 & \$ 1.50 \\2020 & \$ 2.00 \\2021 & \$ 2.50\end{array}201920202021​$1.50$2.00$2.50​

Early in 2019, Maria Bought Shares of MBA Inc $\begin{array} { l l } 2019 & \$ 1.50 \\2020 & \$ 2.00 \\2021 & \$ 2.50\end{array}$