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 $13,000 for 550 shares of Malti Company's common stock. She received a $402 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 $16,500. Kathy would like to earn a return of at least 14% on all of her investments. She is not sure whether the Malti Company stock provided a 14% return and would like some help with the necessary computations. (Ignore income taxes.) Click here to view Exhibit 118-1 and Exhibit 11B-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

Explanation / Answer

Year Cashflow Type Amount Discount Factor @ 14% Present Value on Purchase Date (a) (b) (c = a*b) 1 Dividend $402 0.8772 $352.63 2 Dividend $402 0.7695 $309.33 3 Dividend $402 0.6750 $271.34 3 Sale Proceeds $16,500 0.6750 $11,137.03 Present Value of Inflows on Purchase Date $12,070.33 Purchase Price $13,000.00 Net Present Value (rounding off) -$930 The stock did not provide 14% return as the NPV is negative.

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