Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d

Question

Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $17,000 for 650 shares of Malti Company's common stock. She received a $481 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $21,000. Kathy would like to earn a return of at least 16% on all of her investments. She is not sure whether the Malti Company stock provided a 16% return and would like some help with the necessary computations. (Ignore income taxes.) Click here to view Exhibit 11B-1 and Exhibit 11B-2. to determine the appropriate discount factor(s) using tables. Required: Determine the net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s) and round your Present Value final answers to the nearest whole dollar.) Did Kathy Myers earn 16% return on her investment? Yes No

Explanation / Answer

Calculation of NPV Year Cash Flow PVAF 16% Value 0 -17000 1 -17000 1 481 0.8621 414.6552 2 481 0.7432 357.4614 3 481 0.6407 308.1563 3 21000 0.6407 13454.7 NPV -2465.03 Ans2 No since NPV in negative

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