An investor purchases one share of stock for $85. Exactly one year later, the company pays a dividend of $2.00 per share. This is followed by two more annual dividends of $2.25 and $2.75 in successive years. Upon receiving the third dividend, the investor sells the share for $100. The moneyweighted rate of return on this investment is closest to:
B is correct. The money-weighted rate of return is the internal rate of return (IRR) of the cash flows associated with the investment. Use the cash flow (CF) function of a financial calculator and enter CF0 = -85, CF1 = 2, CF2 = 2.25, and CF3 = 102.75. Calculate the IRR. The answer is 8.15%.