uestion 4 (15% On March 13, 1986, Microsoft issued over 3 million shares and rai
ID: 2614734 • Letter: U
Question
uestion 4 (15% On March 13, 1986, Microsoft issued over 3 million shares and raised $61 million during its Initial Public Offering, with an issue price of $21 per share. It closed most recently at over $101 per share. Since going public, Microsoft stock has split nine (9) times and began paving a dividend in 2003. The specifics of each split and annual dividend are identified below: Stock Splits 09/1987 2:1 04/1990 2:1 06/1991 3:2 06/1992 3:2 05/1994 2:1 12/1996 2:1 02/1998 2:1 03/1999 2:1 02/2003 2:1 Dividend Schedule 2003 $0.24 per share 2004 $3.16 per share 2005 $0.32 per share 2006 $0.28 per share 2007 $0.14 per share 2008 $0.24 per share 2009 $0.52 per share 2010 $0.55 per share 2011 $0.68 per share 2012 $0.83 per share 2013 $0.97 per share 2014 $1.15 per share 2015 $1.29 per share 2016 $1.47 per share 2017 $1.56 per share 2018 $1.68 per share That is, two shares in exchange for one share as represented by the nomenclature "2:1" and three shares in exchange for two shares as represented by "3:2". During this period, the 30-year U.S. Treasury Bill rate averaged nearly 6% Considering all years as full years, and that dividends paid are part of the return of a stock, determine the Internal Rate of Return (IRR) of a 100 share investment in Microsoft Stock since its IPO. This will require the use of Present Worth and/or Future Worth analysisExplanation / Answer
Soln : Company has issued shares of 3 million at price of $21 per share, received an amount of $61 million
Value of 100 shares at that time , if invested, = (61/3)*100 = $2033.33
Total no. of splits = 9 in last 30 years, Total number of shares after all splits with the investor, if he bought it in 1986 and kept it till date = Multiply all the split ratios = (2/1) * (2/1)*(3/2) *(3/2)*(2/1)*(2/1)*(2/1)*(2/1)*(2/1) = 288 shares
In case if the number of shares bought = 100, at present the number of shares = 288*100 = 28800
IRR can be calculated using the cash flows in the years.
We have drawn a table fo cash flows here with 28800 shares happened after all splits, initial investment is of 100 shares :
Using the formula XIRR in excel we can calcualte the IRR of the stock over these years for 100 shares that comes to 29.92%
We can call it as annualized yield of this investment, whch is way higher than the Treasury bills return of 30 years.
Date Cash flows per share Cash flows with 28800 shares and split 13-03-1986 -20.33 -2033 01-01-2003 0.24 6912 01-01-2004 3.16 91008 01-01-2005 0.32 9216 01-01-2006 0.28 8064 01-01-2007 0.14 4032 01-01-2008 0.24 6912 01-01-2009 0.52 14976 01-01-2010 0.55 15840 01-01-2011 0.68 19584 01-01-2012 0.83 23904 01-01-2013 0.97 27936 01-01-2014 1.15 33120 01-01-2015 1.29 37152 01-01-2016 1.47 42336 01-01-2017 1.56 44928 01-01-2018 102.68 2957184 IRR 0.299202639Related Questions
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