Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d

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 $23,000 for 970 shares of Malti Company's common stock. She received a $805 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 $21,000. Kathy would like to earn a return of at least 10% on all of her investments. She is not sure whether the Malti Company stock provided a 10% return and would like some help with the necessary computations. (Ignore income taxes.) Required: a. Determine the net present value. b. Did Kathy Myers earn 10% return on her investment? Yes No

Explanation / Answer

THE NPV IS NEGATIVE AND, KATHY MYERS DID NOT EARN 10% RETURN ON HER INVESTMENT

PARTICULARS NOW 1 2 3 PURCHASE OF STOCK -23000 ANNUAL CASH DIVIDEND 805 805 805 SALE OF STOCK 21000 TOTAL CASH FLOWS -23000 805 805 21805 DISCOUNTING FACTOR(4%) 1 0.962 0.925 0.889 PRESENT VALUE -23000 774 745 19385 NPV -2096

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