study notes book1, reading6 ,LOS 6.c Page 141 in the first example, step 1, why the dividends are negative for t=1 and t=2 thanks
i would also like some clarification, shouldnt dividends be positive? (inflow)?
if you take the time to put the problem here, you might get some detailed explanations.
panny145 Wrote: ------------------------------------------------------- > i would also like some clarification, shouldnt > dividends be positive? (inflow)? it’s pretty clear on the study notes. which says an investor buys a share for $100, and stock paid a dividend 2. using money-weighted method, 100 was considered as inflow, but $2 dividend was an outflow, shouldn’t it also be inflow?
I don’t have the book right in front of me, but if an investor buys a share, he pays out the money. If the shares pays a dividend, the investor recieves the money. Either way, from an investor’s perspective, one is an inflow and one is an outflow.
I was soo clueless about these type questions and if I recall there were zero questions on time weighted and money weighted. I might be wrong, these questions just always confused me like no other
Looking at it the problem it seems like it is backwards. Here is the problem: "Assume an investor buys a share of stock for $100 at t=0 and at the end of the next year (t=1), she buys an additional share for $120. At the end of year 2, the investor sells both shares for $130 each. At the end of each year in the holding period, the stock paid a $2.00 per share dividend. What is the money-weighted rate of return? 1. Determine the timing of each cash flow and whether the cash flow is an inflow (+), into the account, or an outflow (-), available from the account. t=0; purchase of first share = +$100 inflow t=1; dividend from first share = -$2.00 purchase of second sahre = +$120.00 Subtotal +$118.00 inflow t=2; dividend from two shares = -$4.00 proceeds from selling shares = -$260.00 Subtotal, t=2 -$264.00 outflow
Now that I calculate the problem as long as you understand that the purchases and receipts will have different signs both ways will return the same IRR.
Think of it this way, you are calculating a return/performance on the account, therefore, the initial purchase is an inflow into the account, from the investors pocket. The dividend is paid out to the investor and leaves the account, so it is negative. The investor now purchases another share so the account receives another $120 inflow (netted with the dividend outflow paid to investor, this is actually net $118). Again a $4 dividend is paid, and that money leaves the account (negative) and goes into the investor pocket… and so on. The key is to view the problem from the account perspective.
brianr and paul, it helps , thanks.
GOT IT…i was under the assumption that the dividend would just be reinvested (added back into the account?)
Panny, In a practical sense the dividend received for year 1 was reinvested. Note that the investor purchased another share at a price of $120, but also recieved the $2 dividend, so only had to spend $118 for that share. As detailed in this problem though, the dividend was not automatically reinvested - that is, it was paid out and the investor made a decision to reinvest by purchasing another share. Note that the $4 dividend paid in year 2 was not reinvested as the investor pocketed it and then liquidated the full position.