Question

CENGAGE MINDTAP search trus cour Exam 2 | 128:36 Back to Assignment Attempts 12. Problem 16-03 eBook Problem 16-03 A stock costs $100 and pays a $6 annual dividend. If you expect to sell the stock after seven years for $120, what is your anticipated return on the investment? Use Appendix Band Appendix D to answer the question. Round your answer to the nearest whole number.

Answer 1

Expected Rate is IRR. The Rate at which PV of Cash Inflows are equal to Stock Price.

Year	CF	PVF @8%	Disc CF	PVF @9%	Disc CF
0	$ -100.00	1.0000	$ -100.00	1.0000	$ -100.00
1	$       6.00	0.9259	$       5.56	0.9174	$       5.50
2	$       6.00	0.8573	$       5.14	0.8417	$       5.05
3	$       6.00	0.7938	$       4.76	0.7722	$       4.63
4	$       6.00	0.7350	$       4.41	0.7084	$       4.25
5	$       6.00	0.6806	$       4.08	0.6499	$       3.90
6	$       6.00	0.6302	$       3.78	0.5963	$       3.58
7	$       6.00	0.5835	$       3.50	0.5470	$       3.28
7	$ 120.00	0.5835	$    70.02	0.5470	$    65.64
NPV			$       1.26		$     -4.16

Expected Ret = Rate at which least +ve + [ NPV at that Rate / CHange in NPV due to 1% inc in DIsc Rate ] * 1%

= 8% + [ 1.26 / 5.42 ] * 1%

= 8% + 0.23%

= 8.23%