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 S22.000 for 960 shares of Multi Company's common stock. She received a $787 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 S20.000. Kathy would like to earn a return of at least 13% on all of her investments. She is not sure whether the Malti Company stock provided a 13% 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. Required: Determine the net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s) and round your Present Value final answers to the nearest whole dollar.) Did Kathy Myers earn 13% return on her investment?

Explanation / Answer

Kathy Myers a NPV details Now   Year 1 Year 2 Year 3 Purchase price of stock                 (22,000) Cash Dividends Received                      787                    787                        787 Sale Proceeds from Stock                  20,000 Net Cash flows                 (22,000)                    787                    787                  20,787 PV factor @13%                              1                 0.885                0.783                    0.693 PV of Cash flows                 (22,000)                    696                    616                  14,406 NPV = $         (6,280.77) b As the NPV is negative at 13% discount rate , Kathy did not receive 13% return on her investment.

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