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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: a. Determine the net present value. (Round your answer to the nearest whole dollar.) Net present value b. Did Kathy Myers earn 16% return on her investment? O Yes O No

Explanation / Answer

Answer:

1

Net present Value

(2465.02)

Working for the answer:

Year

Amount of
cash flow

Pv factor
at 16%

Present
value of cash flow

Purchase of stock

Now

-17000

1

-17000

Annual Cash Dividend

1 to 3

481

2.2459

1080.28

Sale of stock

3

21000

0.6407

13454.7

Net present value

(2465.02)

___________________________________________

2

No

Explanation

Kathy did not earn 16% required return because negative NPV shows that Kathy earn less return then 16% on her investment

Net present Value

(2465.02)

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