CAGR Formula Example 2
As a college student thirty years ago, Michael Adams purchased $5,000 shares of Wing Wang Industries Inc. He recently sold the stock for $105,000. During his holding period, he received a total of $16,500 in cash dividends. Both his original and selling commissions were $50 each. Calculate the CAGR.Step 1: Calculate Total Return
$105,000 received upon sale + $16,500 cash dividend received = $117,000
----------------------(divided by)----------------------
$5,000 investment + $100 total commissions = $5,100 cost basis
= 22.94 total return (remember, had you wanted to express total return as a percentage, you would have to subtract 1 (e.g., 22.94 – 1), to get 21.94, or 2,194%.)
Step 2: Calculate CAGR
Find the inverse of the X root (1/30 years = 0.33)
22.94(.033) = 1.1098, or 10.98% CAGR
(Again, remember that in order to express as a percentage, you must subtract the result by 1 (e.g., 1.1098 – 1 = .1098, or 10.98% CAGR.)
All in all, this is a decent return for the time period. The investor would have been better off dollar cost averaging into an index fund, but nevertheless, his return was still respectable.
CAGR Formula Example 3
Jasmine Washington purchased $12,500 of common stock in Midwest Bank Inc. She recently sold the investment for $15,000 and received cash dividends of $2,500 during her holding period of four years. She paid a total of $250 in commissions. What is her CAGR?Step 1: Calculate Total Return
$15,000 received upon sale + $2,500 cash dividends received = $17,500
----------------------(divided by)----------------------
$12,500 investment + $250 commissions = $12,750 cost basis
= 1.37 total return
Step 2; Calculate CAGR
1.37(.25) = 1.08, or 8% CAGR
