We are given the information that Microthin’s stock price was $21 in December 2012, $29 in December 2013, $27 in December 2014, $20 in December 2015, and $26 in December 2016. It also pays annual dividend amounts varying from 2012 through 2016.
Let's assume you do the following transactions:
a) In December 2012: buy 30,000 Microthin shares;
b) In December 2013: collect the dividends ($0.39 per share) on your shares, and then sell 10,000 shares;
c) In December 2014: collect the dividends ($0.43 per share) on your remaining shares, and then buy another 15,000 shares;
d) In December 2015: collect the dividends ($0.50 per share) on your remaining shares, and then sell another 10,000 shares.
e) In December 2016: collect the dividends ($0.52 per share) on your remaining shares, and then sell all your remaining shares.
1. What should be the IRR during the "December 2012 – December 2016" period for your Microthin stock investment?
2. The year-by-year annual returns after the World War II are provided on the Excel answer sheet, the tab “Case 3”. Use =AVERAGE function to compute the post-WWII average return for S&P stock market index (Rm) and for US “risk-free” T-bill (Rf), respectively. With such Rm and Rf amounts, and if Microthin’s stock beta = 1.25, what shall be the required return on Microthin stock (using CAPM)? Be careful, CAPM is for long-term stock market equilibrium, so you should NOT only use the short-period 2012-2016 four-year-average stock data only for CAPM purpose. Use the provided whole long-term post-WWII period as CAPM data source.
3. Based on your answers to Q1 and Q2, is your Microthin stock investment over the "Dec 2012 – Dec 2016"period good or bad (using NPV and IRR rules)?