Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Linda Clark received $225,000 from her mother's estate. She placed the funds into the hands of a broker, who purchased the following securities on

image text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribed

Linda Clark received $225,000 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 11% return, and he gave Linda the following computations to support his statement Common stock: Gain on sale ($165,000 - $96,000) Preferred stock: Dividends paid (4% x $51,000 x 3 years) Loss on sale ($37,000 - $51,000) Bonds: Interest paid ($4,500 x 3 years) Gain on sale ($83,000 - $78,000) Net gain on all investments $ 69,000 6,120 (14,000) 13,500 5,000 $ 79,620 $79,620 3 years/$225,000 = 11.80 % Click here to view Exhibit 14B-1 and Exhibit 14B-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 $285,000 proceeds ($165,000+ $37,000+ $83,000 = $285,000) 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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamental Financial Accounting Concepts

Authors: Thomas Edmonds, Christopher Edmonds

9th edition

9781259296802, 9781259296758, 78025907, 1259296806, 9781259296765, 978-0078025907

More Books

Students also viewed these Accounting questions

Question

What are the characteristics of an intangible asset? AppendixLO1

Answered: 1 week ago