Early in 2015, Maria bought shares of MBA Inc.at $27.85 per share.She received the following dividends per share (end of year).
2015 $1.50
2016 $2.00
2017 $2.50
Immediately after receiving the 2017 dividend, she sold the stock for $32.50 per share.Her internal rate of return on this investment was

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR) on this investment, we need to use the cash flows (dividends and sale price) and solve for the discount rate that makes the present value of the cash flows equal to the initial investment ($27.85 per share). We can use Excel or a financial calculator to do this calculation, but here is the manual calculation:

PV = -27.85
F1 = 1.50
F2 = 2.00
F3 = 2.50
F4 = 32.50

n = 4 (years)
We want to solve for i, the discount rate or IRR.

PV = F1/(1+i) + F2/(1+i)^2 + F3/(1+i)^3 + (F4+PV)/(1+i)^4

Simplifying and rearranging terms:
0 = F1 + F2/(1+i) + F3/(1+i)^2 + (F4+PV)/(1+i)^3

Using trial and error or a financial function in Excel or a calculator, we find that the IRR is approximately 11.99%. Therefore, the answer is C, 11.99%.

Early in 2015, Maria Bought Shares of MBA Inc