Question

3. An individual has $50,000 to invest. The government treasury bills (T-bills) pay 1.5% interest per year. She considers investing in the stock parket instead, by buying a stock that now sells for $45 ench and pays an anun dividend of $7/per stock. She thinks that after 6 years the stock will be selling for $55 each. What is the rate of return of the stock investment and is it a better deal than the T-bills?

Answer 1

This investment yields about 17.8% per annum of IRR, which is definitely better than the 1.5% yield on treasury bills.

		50000*7/45	50000*55/45
T	Investment	Dividend	Selling price	Total Cash Flow
0	-50,000.00			-50,000.00
1		7,777.78		7,777.78
2		7,777.78		7,777.78
3		7,777.78		7,777.78
4		7,777.78		7,777.78
5		7,777.78		7,777.78
6		7,777.78	61,111.11	68,888.89
IRR				17.9%