Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2583988 • 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 $28,000 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 $25,000. Kathy would like to earn a return of at least 6% on all of her investments. She is not sure whether the Malti Company stock provided a 6% return and would like some help with the necessary computations. (Ignore income taxes.)
Determine the net present value.
Required:Explanation / Answer
Initial cash Outflow = $28,000 for 400 Shares
She received $284 as cash dividend each year
Cash received at the end of 3 Year = $25,000 + $284 (Dividend)
= $25,284
Year
Cash Inflow
Present Value Factor @6%
Total Present Value
1
$284
0.943
$267.81
2
$284
0.890
$252.76
3
$25,284
0.840
$21,238.56
Total
$21,759.13
NPV = Present Value of Cash Inflows – Initial Cash Outflow
= $21,759.13 - $28,000
NPV = ($6,240.87)
No, the company Stock hasn’t provided 6% rate of return as the NPV is negative in this case. The decision was not financially Viable
Year
Cash Inflow
Present Value Factor @6%
Total Present Value
1
$284
0.943
$267.81
2
$284
0.890
$252.76
3
$25,284
0.840
$21,238.56
Total
$21,759.13
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