Question

7 Find the MIRR assuming an 8 % reinvestment rate for the following Cash flows;

T0 = - 75

T1 = 50

T2 = 45

7a. A common stock grows at a rate of 10 % for just one year, then it settles into a constant growth rate a 1 %. The dividend paid today is $ 2, and investors want a 10 % return. What is this stock worth today?

Answer 1

7]

MIRR is calculated using MIRR function in Excel :

MIRR is 14.89%

7a]

Value of stock = present value of next year dividend + present value of terminal value at end of 1 year

Terminal value at end of 1 year = Year 1 dividend * (1 + growth rate after 1 year) / (required return - growth rate after 1 year)

Present value = future value / (1 + required return)^{number of years}

Dividend after 1 year = $2 * (1 + 10%) = $2.20

The value of stock today = ($2.20 / (1 + 10%)¹) + ($2.20 * ((1 + 1%) * (10% - 1%)) / (1 + 10%)¹)

The value of stock today = $24.44