Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011)

At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. What was his average annual rate of return form both dividends and capital gains? (Hint: compute the IRR, assume that all dividends were received at the end of the year.)
What will be an ideal response?

Answer: Josh's cash flows on a per share basis were as follows:

PV at 4.076%
2007 (beginning) -$76.63 -76.63
2007 (end) 1.37 1.32
2008 (end) 1.55 1.43
2009 (end) 1.66 1.47
2010 (end) 1.74 1.48
2011 (end) 1.85 + 84.76 70.93
Total 00.00

Josh has earned 4.076% on his investment in XOM. The solution involves finding the internal rate of return for all cash flows. The discount rate of 4.076%, which equates the present value of dividends and the 2011 price to the 2007 price can be found by trial and error or more efficiently using a financial calculator. Because the internal rate of return is a percentage, it does not matter whether you use the cash flows for 100 shares or a single share.