Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2500312 • Letter: K
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 $18,000 for 800 shares of Malti Company’s common stock. She received a $560 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 $20,000. Kathy would like to earn a return of at least 10% on all of her investments. She is not sure whether the Malti Company stock provided a 10% return and would like some help with the necessary computations. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Determine the net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and final answers to the nearest whole dollar.)
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 $18,000 for 800 shares of Malti Company’s common stock. She received a $560 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 $20,000. Kathy would like to earn a return of at least 10% on all of her investments. She is not sure whether the Malti Company stock provided a 10% return and would like some help with the necessary computations. (Ignore income taxes.)
Explanation / Answer
Now 1 2 3 Net Purchase of Stock -18,000.00 Annual cash dividend 560.00 560.00 560.00 Sale of stock 20,000.00 Total cash flows -18,000.00 560.00 560.00 20,560.00 Discount factor 1.00 0.91 0.83 0.75 Present value -18,000.00 509.09 462.81 15,447.03 Net present value -1,581.07 Since NPV is less than 0 at 10% , She is not earning enough return.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.