Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2583566 • 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 $22,000 for 960 shares of Malti Company's commorn stock. She received a $787 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 13% on all of her investments. She is not sure whether the Malti Company stock provided a 13% 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: a. Determine the net present value. (Round your answer to the nearest whole dollar.) Net present value b. Did Kathy Myers earn 13% return on her investment? O Yes O NoExplanation / Answer
ans)
a) Year Amount of cash flows 13% factor P.V of cash flows
Purchase of stock now (22000) 1.0 (22000)
Annual cash dividends 1 -3 787 2.361 1858
Sale of stock 3 20,000 0.693 13860
Net present value (6282)
b)
No, Kathy did not earn a 13% return on the Malti Company stock. The negative net presentvalue indicates that the rate of return on the investment is less than the minimum required rate ofreturn of 13%.
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