Anita Vasquez received $160,000 from her mothers estate She placed the funds into the hands of a broker, who purchased the following securities on Anitas behalf a Common stock was purchased at a cost of $80,000 The stock paid no dividends, but it was sold for $180,000 at the end of four years b Pre...

1 A net present value computation for each investment follows Item Years Amount of Cash Flows 20 Fac ...

Anita Vasquez received $160,000 from her mothers estate. She placed the funds into the hands of a

Question:

Anita Vasquez received $160,000 from her mother’s estate. She placed the funds into the hands of a who purchased the following securities on Anita’s behalf:
a. was purchased at a cost of $80,000. The stock paid no dividends, but it was sold for $180,000 at the end of four years.
b. Preferred stock was purchased at its of $30,000. The stock paid a 6% (based on each year for four years. At the end of four years, the stock was sold for $24,000.
c. Bonds were purchased at a cost of $50,000. The bonds paid $3,000 in interest every six months. After four years, the bonds were sold for $58,500. (Note: In discounting a cash flow that occurs semiannually, the procedure is to halve the and double the number of periods. Use the same procedure in discounting the proceeds from the sale.)
The securities were all sold at the end of four years so that Anita would have funds available to start a new business venture. The stated that the investments had earned more than a 20% return, and he gave Anita the following computation to support his statement:
:
Gain on sale ($180,000 − $80,000) . . . . . . . . $100,000
Preferred stock:
Dividends paid (6% × $30,000 × 4 years) . . . 7,200
Loss on sale ($24,000 − $30,000) . . . . . . . . . (6,000)
Bonds:
Interest paid ($3,000 × 8 periods) . . . . . . . . . 24,000
Gain on sale ($58,500 − $50,000) . . . . . . . . . 8,500
Net gain on all investments . . . . . . . . . . . . . . . . $133,700
$133,700 ÷ 4 years / $160,000 = 20.9 %

Required:
(Ignore income taxes.)
1. Using a 20% compute the of each of the three investments. On which investment(s) did Anita earn a 20% rate of return? (Round computations to the nearest whole dollar.)
2. Considering all three investments together, did Anita earn a 20% rate of return? Explain.
3. Anita wants to use the $262,500 proceeds ($180,000 + $24,000 + $58,500 = $262,500) from sale of the securities to open a fast-food franchise under a 10-year contract. What net annual cash inflow must the store generate for Anita to earn a 16% return over the 10-year period? Anita will not receive back her original investment at the end of the contract. (Round computations to the nearest whole dollar.)

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