how to calculate Return On Investment when dividend cash flows are given?

Question

MBA valuation of securities financial managment question

Answer 1

You need a caculator with an IRR function, or a program such as MS Excel in which to enter the cash flows so the program can calculate the result.

Your initial negative cash flow is the current price of the stock. Dividends will obviously be a positive cash flow in their speficic time periods. You need to forecast the dividends based on whatever assumptions are appropriate. Does the company have a history of increasing dividends, and can you reasonably expect the stream of future dividends to continue to increase at that same rate?

Your final positive value is the value of the stock at the end of your final forecasting period. You'll need to estimate it based on the assumed risk-free return at that time. Tough to do, but for this exercise it needs to be done.

Hope this helps.

Answer 2

With a calculator?