Assume that $10,000 was invested in the stock of general medical corporation wit
ID: 2741843 • Letter: A
Question
Assume that $10,000 was invested in the stock of general medical corporation with the intention of selling after one year. The stock pays no dividends so the entire return will be based on the price of the stock when sold. The opportunity cost of the capital on the stock is 10 percent. (A) to begin, assume that the stock sale nets $11,500. What is the dollar return on the stock investment? What is the rate of return? (B) assume that the stock price falls and the net is only $9,500 when the stock is sold. What is the older return and rate of return? (c) assume that the sales price remain the same but the stock is held for three years. Now what is the dollar return and rate of return? Show formulas if applicable .
Explanation / Answer
A) Assume that the stock sale nets $11,500.
Net Present Value (NPV) = Present value of Cash inflow - Present value of Cash outflow
Present value of cash inflow = 11500 * Present value factor for one year @ 10 %
= 11500 * 0.9091 (approx)
= 10454.65
Present value of cash outflow = $ 10000
Net Present Value (NPV) = 10454.65 - 10000 = $ 454.65
The Dollar return on the stock investment = 454.65
The Rate of return = 11500 - 10000 / 10000 = 0.15 i.e., 15 %.
B) Assume that the stock price falls and the net is only $9,500.
Net Present Value (NPV) = Present value of Cash inflow - Present value of Cash outflow
Present value of cash inflow = 9500 * Present value factor for one year @ 10 %
= 9500 * 0.9091 (approx)
= $ 8636.45
Present value of cash outflow = $ 10000
Net Present Value (NPV) = 8636.45 - 10000 = (-) $ 1363.55 .
The Dollar return on the stock investment = (-) 1363.55 and
The Rate of return = 9500 - 10000 / 10000 = (-) 0.05 i.e., (-) 5 %.
Conclusion:-
Question Answers A) Assume that the stock sale nets $11,500. The Dollar return on the stock investment = 454.65 and The Rate of return = 15 %. B) Assume that the stock price falls and the net is only $9,500. The Dollar return on the stock investment = (-) 1363.55 and The Rate of return = (-) 5 %.Related Questions
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