Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2384935 • 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. (Ignore income taxes.)
Explanation / Answer
http://www.cramster.com/answers-nov-10/accounting/net-present-kathy-myers-frequently-purchases-stocks-bonds_1040303.aspx or The present value of the dividends payment is calculated using the Present Value of an Annuity table. Find the intersection of 12% and 5 years. On my table that value is 3.605 3.605 X $704 = $2,537.92 Te Present value of the price she received at the end of the 5 years is calculated using the Present Value of a Lump Sum table. Again find the intersection of 12% and 5 years. On my table that is 0.5674 0.5674 X $22,600 = $12,823.24 $12,823.24 + $2,537.92 = $15,361.16 NPV = $15,361.16 - $19,000 = (3,638.84) Since the NPV is a negative number, she earned much less than 12% on this investment. For Extra Credit Calculate the actual IRR on the investment. I used the RATE function in Excel, but you can use the tables as well. Using the PV of a Lump Sum table, the factor at 5 years at 7% is .7130 Using the PV of an Annuity table, the factor at 5 years at 7% is 4.100 (4.100 X $704) + ($22,600 X .7130) = $2,886 + $16,114 = $19,000 So you can see that the actual rate of return earned is only 7%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.