On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purcha

Question

On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends of $2.60 per share in 20X1 and 20X2; the dividend was raised to $3.10 per share in 20X3. On December 31, 20X3, Greene sold his holdings and generated proceeds of $13,000. Greene uses the net-present- value method and desires a 16% return on investments.

a.       Prepare a chronological list of the investment's cash flows. Note: Greene is entitled to the 20X3 dividend.

b.      Compute the investment's net present value, rounding calculations to the nearest dollar.

c.       Given the results of part (b), should Greene have acquired the Heartland stock? Briefly explain.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Cash Flow (Year 1) = 500*2.60 = 1300

Cash Flow (Year 2) = 500*2.60 = 1300

Cash Flow (Year 3) = 500*3.10 + 13000 = 14550

Part B:

NPV = -10000 + 1300/(1+.16)^1 + 1300/(1+.16)^2 + 14550/(1+.16)^3 = 1408.37

Part C:

Yes, the stock should be acquired as the stock offers a + NPV to the investor.

Thanks.

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