Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2595308 • 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 $13,000 for 200 shares of Malti Company’s common stock. She received a $420 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 $16,000. 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.
1. Compute the net present value that Kathy earned on her investment in Malti Company stock.
Compute the net present value that Kathy earned on her investment in Malti Company stock. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount.)
Explanation / Answer
Solution:
As net present value is lesser than investment amount, hence Kathy did not earn 14% return on her investment.
Net Present Value of Cash flows of Kathy Investment Year Annual Cash Flow PV factor - 14% Present Value 1 $420 0.8772 368 2 $420 0.7695 323 3 $16,420 0.6750 11,083 Total 11,775Related Questions
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