Suppose You Purchase One Share of the Stock of Cereal

question 18

Multiple Choice

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1,you receive a $1 dividend,and buy one more share for $72.At the end of year 2,you receive total dividends of $2 (i.e.,$1 for each share) ,and sell the shares for $67.20 each.The time-weighted return on your investment is __________.

• A)10.0%
• B)8.7%
• C)19.7%
• D)17.6%
• E)none of the above

---

Definitions:

Incremental Value

The additional value that is gained from making an investment or conducting a project, compared to doing nothing.

Net Present Value

A financial analysis method used to evaluate the profitability of an investment or project, assessing the value of all future cash flows, both incoming and outgoing.

All-Equity Firms

Companies that are financed entirely through equity without any debt.

Shares Outstanding

The total number of a company's shares of stock that are owned by shareholders including those held by institutional investors and restricted shares held by insiders and company officers.