A stock has just issued a dividend of $1

Finance Dec 27, 2020

A stock has just issued a dividend of $1.38 per share. This dividend is expected to grow at 1.50% annually forever. If you purchase this stock for $33.30 today, what will be your IRR on this investment?

5.71%
5.85%
5.99%
6.13%
6.28%

Expert Solution

Next year dividend = 1.38 (1 + 1.50%) = 1.4007

Price = Next year dividend / IRR - growth rate

33.3 = 1.4007 / IRR - 0.015

33.3IRR - 0.4995 = 1.4007

IRR = 0.0571 or 5.71

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