Economics Question

Economics Question

Answer the following questions using the information presented in class and available in the textbook.  Each answer is to be hand written/calculated, but you may use Excel to check your answers.

When completing the exam, each answer shall include the following:

1. A statement identifying the engineering economics method and decision criteria used in determining the answer
2. Cash Flow Diagrams for each component of the question/answer
3. The formula(s) used for each calculation – e.g., P = F / (1 + i)^N (after the set of formulas for each problem have been identified, “interest factors” can be used to simplify the calculations and avoid errors)
4. A proper statement defining the use of the factors found in Appendix B “Interest Factors for Discrete Compounding” – e.g., Present Worth of a Future Amount at 8% annually for 25 years should be written as: “(P/F, 8%, 25) = 0.1460” prior to its use in a calculation
5. A concluding statement answering the ultimate question

Note:  Points will be awarded for each answer element “a” through “e”.

QUESTION

On March 13, 1986, Microsoft issued over 3 million shares at an issue price of $21 per share.  By doing so, it raised $61 million during its Initial Public Offering (I.P.O.).  Now, its market capitalization exceeds $1.94 trillion and its stock recently closed at approximately $260 per share.  Since going public, Microsoft stock has split nine (9) times and began paying a dividend in 2003.  The specifics of each split and annual dividend are identified below:

Stock Splits                                        Dividend Schedule                  2012   $0.83 per share 09/1987   2:1.                                2003   $0.24 per share                  2013   $0.97 per share

04/1990   2:1                                  2004   $3.16 per share                    2014   $1.15 per share

06/1991   3:2                                  2005   $0.32 per share                    2015   $1.29 per share

06/1992   3:2                                  2006   $0.28 per share                    2016   $1.47 per share

05/1994   2:1                                  2007   $0.14 per share                    2017   $1.56 per share

12/1996   2:1                                  2008   $0.24 per share                    2018   $1.68 per share

02/1998   2:1                                  2009   $0.52 per share                    2019   $1.84 per share

03/1999   2:1                                  2010   $0.55 per share                    2020   $2.04 per share

02/2003   2:1                                  2011   $0.68 per share                    2021   $2.24 per share

Note about Stock Splits:  That is, two shares in exchange for one share as represented by the nomenclature 2:1 and three shares in exchange for two shares as represented by 3:2.

During this period, the 30-year U.S. Treasury Bill interest rate averaged approximately 6%.

Considering all years as full years, and that dividends paid are a part of the return of a stock, determine the TOTAL PROJECTED Rate of Return for a 100 share investment in Microsoft at the hypothetical sale/disposal of all shares at the end of 2021.