uestion 4 (15% On March 13, 1986, Microsoft issued over 3 million shares and rai

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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 analysis

Explanation / Answer

Till 2003 there is spliting of shares we will determine number of shares in 2003.

2

Hence number of share in 2003 is 28,800.'

The Cost of original Share is (61/3*100) = $2033.33

From 2003 the company started distributing Dividend.

At IRR the Cost of Investment is equal to the Disconted Return from investment.

IRR Can be computed using Trial and Error Method as follws

Since return are very huge the IRR Must be very high as considerbelow :-

1,906   

Since if we increase the discounting rate by 200% there is deduction in present value by $ 969 (2875-1906)

but we want to reduce the present value only by $ 841.67 (2875-841.67).

Hence the IRR will be 600% + 841.67 *200/969

= 600% + 173.72%

Hence the IRR = 773.72%.

Year Shares Split Ratio 86 100 87 200 2 90 400 2 91 600 1.5 92 900 1.5 94 1800 2 96 3600 2 98 7200 2 99 14400 2 2003 28800

2

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