Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2582551 • 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 $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.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required a. Determine the net present value. (Round your answer to the nearest whole dollar.) Net present value b. Did Kathy Myers earn 10% return on her investment? O Yes O NoExplanation / Answer
a) Net Present Value:
YEAR
CASH INFLOW/(OUTFLOW)
PVF@10%
NET PRESENT VALUE
0
($23000)
1
($23000)
1 to 3 years
$805
2.487
$2002.04
3
$21000
0.751
$15771
Net Present Value:
($5226.96)*
*Net Present Value is Negative.
b) As there is Negative Net Present Value, Return on Investment will be Negative, so Kathy Myers is not earning 10% Return on Investment.
YEAR
CASH INFLOW/(OUTFLOW)
PVF@10%
NET PRESENT VALUE
0
($23000)
1
($23000)
1 to 3 years
$805
2.487
$2002.04
3
$21000
0.751
$15771
Net Present Value:
($5226.96)*
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