On January 2, Fred Critchfield paid $18,000 for 920 shares of the common stock o

Question

On January 2, Fred Critchfield paid $18,000 for 920 shares of the common stock of Acme Company. Mr. Critchfield received an $0.78 per share dividend on the stock at the end of each year for five years. At the end of five years, he sold the stock for $21,000. Mr. Critchfield has a goal of earning a minimum return of 16% on all of his investments. (Ignore income taxes.)

   

Determine the net present value. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)

Yes

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. On January 2, Fred Critchfield paid $18,000 for 920 shares of the common stock of Acme Determine the net present value. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal place Did Mr. Critchfield earn a 16% return on the stock?

Explanation / Answer

The cash flows are

CFo (18,000)

CF1-4 717.6 (920*.78)

CF 5 717.6 +21,000= 21,717.6

Discount these cash flows at 16% we get -5,652 of net present value so no he did not get a 16% annual return.

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