Question

1. Assume you buy 100 shares of stock at a price of $63.75 per share and incur brokerage fees of $200. You own the stock for 5 years and receive dividends of 50 cents per share at the end of each quarter. Immediately after receiving the 20th quarterly dividend, you sell the stock at a price of $48.63 per share and incur brokerage fees of $200. Calculate your rate of return. (IRR)
2. You own a thriving restaurant but want to change careers. Your brother offers to buy the business with the following monthly payments: $2,750 at the end of each month for 4 years, followed by $3,000 at the end of each month for 3 years. Assuming that you can earn 9% compounded monthly, what is the equivalent cash price of your brother’s offer? (NPV)

Answer 1

1. Your cash flow is as follows.
  initial outlay: $63.75*100 +200.00 = $6575
  quarterly dividend: $0.50*100 = $50 . . . for 19 quarters
  income from sale: $48.63*100 -200.00 +50.00 = $4713
A suitable financial calculator computes the IRR as -3.23% per year.


2. Your cash flow is as follows.
  initial income/outlay: 0
  monthly income: $2750 . . . for 48 months
  monthly income: $3000 . . . for 36 months
  applicable interest rate: .09/12 = 0.0075 . . . per month
A suitable financial calculator computes the NPV as $176,415.70.