Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each. The dollar-weighted return on your investment is
A) 10.00%.
B) 8.78%.
C) 19.71%.
D) 20.36%.

Question

Quizplus · Accepted Answer

The dollar-weighted return considers the timing and amount of cash flows. The cash flows are: -$50 at time 0, -$71 (net of $1 dividend) at time 1, and $136.40 (sale of two shares at $67.20 each plus $2 dividends) at time 2. Solving the equation for the internal rate of return gives approximately 8.78%.

Suppose You Purchase One Share of the Stock of Cereal