Dollar-Weighted Return Calculation

Dollar-Weighted Return

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Question

Assume an investor makes the following investments:

During year one, the stock paid a $5.00 per share dividend. In year 2, the stock paid a $7.50 per share dividend. The investor's required return is 35.0 percent.

The dollar-weighted return is:

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Explanations

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A. B. C. D.

A

To calculate the dollar-weighted return:

Step 1: Determine the timing and sign (inflow, outflow) of the cash flows

Purchase share 2, $75.00 outflow

Received dividend from share 2, $7.50 inflow

Sell share 1, $100.00 inflow,

Sell share 2, $100.00 inflow.

Step 2: Calculate the net cash flows for each year (all amounts in $)

Step 3: Use your financial calculator to solve for IRR (or use trial and error)

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