Assume the following series of financial transactions:
t0: Purchase 1500 shares of Allcycles.com for $18,555.00
t1: Purchase an additional 500 shares for $8,130.00
t2: Purchase an additional 1000 shares for $18,000.00
t3: Sell 1000 shares for $19,810
t4: Sell the remaining 2000 shares for $42,400
Investments of this type have typically justified a 12.50% rate of return. Assuming no taxes or transaction costs, what is the dollar-weighted rate of return for this series of investments?
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A. B. C. D. E. F.C
Remember that the dollar-weighted rate of return uses the IRR equation in the determination of its answer. Further, the dollar-weighted rate of return is another name for the IRR equation, and this nomenclature is commonly used within the field of investment management. So said, the required rate of return is not explicitly factored into the calculation of the dollar-weighted rate of return; rather what is being determined is the rate which equates the present value of the cash inflows to the present value of the cash outflows. In the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each period. In this example, the cash flows have been stated, and no preliminary calculation is necessary. The portfolio cash flows are illustrated as follows: t0: ($18,555.00) t1: ($8,130.00) t2: ($18,000.00) t3: $19,810.00 t4: $42,400.00
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 12.885% for this investment