Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2399659 • 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 $19,000 for 930 shares of Malti Company’s common stock. She received a $735 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 $22,000. Kathy would like to earn a return of at least 17% on all of her investments. She is not sure whether the Malti Company stock provided a 17% 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.
Determine the net present value.
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 $19,000 for 930 shares of Malti Company’s common stock. She received a $735 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 $22,000. Kathy would like to earn a return of at least 17% on all of her investments. She is not sure whether the Malti Company stock provided a 17% return and would like some help with the necessary computations. (Ignore income taxes.)
Explanation / Answer
Net Present value = Present value of cash inflow-Present value of cash outflow
= (735*2.21+22000*0.624)-19000
Net present value = -3647.65
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