Linda Clark received $170,000 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 $126,000 The stock paid no dividends, but it was sold for $210,000 at the end of three years b Preferred stock was purchased at its par value of $39,000 The stock paid a 9 dividend (based on par value) each year for three years At the end of three years, the stock was sold for $22,000 c Bonds were purchased at a cost of $66,000 The bonds paid annual interest of $4,000 After three years, the bonds were sold for $68,000 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 18 return, and he gave Linda the following computations to support his statement Common stock Gain on sale ($210,000 $126,000) $ 84,000 Preferred stock Dividends paid (9 $39,000 3 years) 10,530 Loss on sale ($22,000 $39,000) (17,000) Bonds Interest paid ($4,000 3 years) 12,000 Gain on sale ($68,000 $66,000) 2,000 Net gain on all investments $ 91,530 $91,530 3 years 17 9 $170,000 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 18 discount rate, compute the net present value of each of the three investments (Any cash outflows should be indicated by a minus sign Round discount factor(s) to 3 decimal places ) 1 b On which investment(s) did Linda earn a 18 rate of return (You may select more than one answer Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers ) Common stock Bonds Preferred stock 2 Considering all three investments together, did Linda earn a 18 rate of return Yes No 3 Linda wants to use the $300,000 proceeds ($210,000 $22,000 $68,000 $300,000) from sale of the securities to open a retail store under a 9 year franchise contract What annual net cash inflow must the store generate for Linda to earn a 7 return over the 9 year period (Round discount factor(s) to 3 decimal places )

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 06, 2024

Linda Clark received $170,000 from her mothers estate. She placed the funds into the hands of a broker, who purchased the following securities on Lindas

Linda Clark received $170,000 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 $126,000. The stock paid no dividends, but it was sold for $210,000 at the end of three years.
b.	Preferred stock was purchased at its par value of $39,000. The stock paid a 9% dividend (based on par value) each year for three years. At the end of three years, the stock was sold for $22,000.
c.	Bonds were purchased at a cost of $66,000. The bonds paid annual interest of $4,000. After three years, the bonds were sold for $68,000.

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 18% return, and he gave Linda the following computations to support his statement:


Common stock:
Gain on sale ($210,000 $126,000)	$	84,000
Preferred stock:
Dividends paid (9% $39,000 3 years)		10,530
Loss on sale ($22,000 $39,000)		(17,000)
Bonds:
Interest paid ($4,000 3 years)		12,000
Gain on sale ($68,000 $66,000)		2,000

Net gain on all investments	$	91,530

	$91,530 3 years	= 17.9%
	$170,000	= 17.9%

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 18% discount rate, compute the net present value of each of the three investments. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)

1-b.

On which investment(s) did Linda earn a 18% rate of return? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

	Common stock
	Bonds
	Preferred stock

Considering all three investments together, did Linda earn a 18% rate of return?

	Yes
	No

3.	Linda wants to use the $300,000 proceeds ($210,000 + $22,000 + $68,000 = $300,000) from sale of the securities to open a retail store under a 9-year franchise contract. What annual net cash inflow must the store generate for Linda to earn a 7% return over the 9-year period? (Round discount factor(s) to 3 decimal places.)