Question
Check my workCheck My Work button is now enabled10 Item 2 Item 2 6 points Linda Clark received $227,000 from her mothers estate. She placed
Check my workCheck My Work button is now enabled10
Item 2
Item 2 6 points
Linda Clark received $227,000 from her mothers estate. She placed the funds into the hands of a broker, who purchased the following securities on Lindas behalf:
a. Common stock was purchased at a cost of $97,000. The stock paid no dividends, but it was sold for $166,000 at the end of three years.
b. Preferred stock was purchased at its par value of $52,000. The stock paid a 4% dividend (based on par value) each year for three years. At the end of three years, the stock was sold for $37,000.
c. Bonds were purchased at a cost of $78,000. The bonds paid annual interest of $4,500. After three years, the bonds were sold for $83,000.
The securities were all sold at the end of three years so that Linda would have funds available to open a new business venture. The broker stated that the investments had earned more than a 11% return, and he gave Linda the following computations to support his statement:
Common stock: | |||
Gain on sale ($166,000 $97,000) | $ | 69,000 | |
Preferred stock: | |||
Dividends paid (4% $52,000 3 years) | 6,240 | ||
Loss on sale ($37,000 $52,000) | (15,000 | ) | |
Bonds: | |||
Interest paid ($4,500 3 years) | 13,500 | ||
Gain on sale ($83,000 $78,000) | 5,000 | ||
Net gain on all investments | $ | 78,740 | |
$78,740 3 years | = 11.60 % |
$227,000 |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1-a. Using a 11% discount rate, compute the net present value of each of the three investments.
1-b. On which investment(s) did Linda earn a 11% rate of return?
2. Considering all three investments together, did Linda earn a 11% rate of return?
3. Linda wants to use the $286,000 proceeds ($166,000 + $37,000 + $83,000 = $286,000) from sale of the securities to open a retail store under a 9-year franchise contract. What minimum annual net cash inflow must the store generate for Linda to earn a 8% return over the 9-year period?
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