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Linda Clark received $190,000 from her mother's estate. She placed the funds into the hands of a broker, who purchased the following securities on Linda's
Linda Clark received $190,000 from her mother's estate. She placed the funds into the hands of a broker, who purchased the following securities on Linda's behalf a. Common stock was purchased at a cost of $96,000. The stock paid no dividends, but it was sold for $165,000 at the end of three years. b. Preferred stock was purchased at its par value of $51,000. 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 16% return, and he gave Linda the following computations to support his statement: Common stock: 69,000 Gain on sale ($165,000 $96,000) Preferred stock: Dividends paid (4% x $51,000 x 3 years) 6,120 Loss on sale ($37,000-$51,000) (14,000) Bonds 13,500 Interest paid ($4,500 x 3 years) Gain on sale ($83,000-$78,000) 5,000 79,620 Net gain on all investments $79,620 3 years 14.0% $190,000
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