uestion 7 On January 2, 2014, Judy Smith purchased 700 shares of New Telecommuni
ID: 2472083 • Letter: U
Question
uestion 7
On January 2, 2014, Judy Smith purchased 700 shares of New Telecommunications common stock at $34 per share. The company paid a $1.25 dividend per share on December 28 of that year, and raised the amount by $0.25 per share for a distribution on December 28, 2015. Judy sold her investment on December 30, 2015, generating a $4,000 gain on the sale of stock.
Required:
A. Prepare a dated listing of the cash inflows and outflows related to Judy's stock investment. Ignore income taxes.
B. Assume that Judy has a 8% hurdle rate for all investments. Rounding to the nearest dollar, compute the net present value of her investment in New and determine whether she achieved her 8% goal.
Explanation / Answer
A)Outflows:
Purchase of the stock = 700 shares x $34 = $23,800
Cash inflows (Dividend)
Receiving dividend = 700 shares x $1.25 per share = 875
Cash inflow (sale)
Sale value = 23800 +4000
= 27,800
N=1
R= 8%
FV = PV x (1+r)^n
= 23,800 x(1+0.08)^1
= 25,700
Judy has received =27800+875 = 28675
She is getting more than of what she is expected to get. So she achieved her objective.
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