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Linda Clark received $212,000 from her mother's estate. She placed the funds into the hands of a broker, who purchased the following securities on
Linda Clark received $212,000 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 $105,000. The stock paid no dividends, but it was sold for $155,000 at the end of three years. b. Preferred stock was purchased at its par value of $40,000. The stock paid a 8% dividend (based on par value) each year for three years. At the end of three years, the stock was sold for $27,000. c. Bonds were purchased at a cost of $67,000. The bonds paid annual interest of $1,000. After three years, the bonds were sold for $69,000. 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 8% return, and he gave Linda the following computations to support his statement: Common stock: Gain on sale ($155,000 $105,000) Preferred stock: Dividends paid (8 $40,000 3 years) Loss on sale ($27,000 $40,000) Bonds Interest paid ($1,000 x 3 years) Gain on sale ($69,000 $67,000) Net gain on all investments $ 50,000 9,600 (13,000) 3,000 2,000 $ 51,600 $51,600 3 years/$212,000 = 8.10 % Click here to view Exhibit 148-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using tables.
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