Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2497179 • 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 $14,000 for 400 shares of Malti Company’s common stock. She received a $284 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 $18,000. Kathy would like to earn a return of at least 12% on all of her investments. She is not sure whether the Malti Company stock provided a 12% 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. (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.)
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 $14,000 for 400 shares of Malti Company’s common stock. She received a $284 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 $18,000. Kathy would like to earn a return of at least 12% on all of her investments. She is not sure whether the Malti Company stock provided a 12% return and would like some help with the necessary computations. (Ignore income taxes.)
Explanation / Answer
a)NPV (3 years ago at the time of making Investment in Malti ) = Present value of Cash Inflows - Initial Investment
= [284*PVIFA(12%,3) + 18000*PVIF(12%,3)] - 14,000
= [284*2.402+ 18,000*0.7118] - 14,000
= 13,495 - 14,000
= -$505
..
..
b)Since NPV is neagtive at Required rate of return of 12% , Kathy Myers did not earned 12% return on his Investment.She earned slighltly less than 12% .
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