Ryan Williams, a professional money manager with Smith, Kleen & Associates, purchased 200 shares of Invertran Semiconductor at t0 for $42. At time t1,
Invertran paid a $0.90 per-share dividend on the 200 shares owned and Mr. Williams purchased an additional 100 shares for $56.87 per share. At t2, Invertran paid a dividend of $1.00 per share on the 300 shares and then Mr. Williams sold all 300 shares for $63.15 per share. Similar investments have merited a 12.25% discount rate. Calculate the dollar-weighted rate of return for this investment.
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A. B. C. D. E. F.F
Remember that the dollar-weighted rate of return uses the IRR equation in the determination of the answer. Further, the dollar-weighted rate of return is simply another name for the IRR equation. So said, the discount rate is not incorporated in the determination of the dollar-weighted rate of return, and has been included within this example largely as a distraction. In the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each period. This process is illustrated as follows: t0: {-[200 shares purchased * $42 per share] = ($8,400) t1: {-[100 shares purchased * $56.87 per share] + [$0.90 per share dividend * 200 shares] = ($5,507) t2: {[300 shares sold * $63.15 per share] + [$1.00 per share dividend * 300 shares]} = $19,245
Now that the cash flows have been determined, incorporating this information into your calculator's cash flow worksheet and solving for IRR will yield a dollar- weighted rate of return of 22.10% for this investment.