Linda Clark received $231,000 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 13% 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 = 13.20 % $231,000

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 13% discount rate, compute the net present value of each of the three investments. 1-b. On which investment(s) did Linda earn a 13% rate of return? 2. Considering all three investments together, did Linda earn a 13% rate of return?

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 minimum annual net cash inflow must the store generate for Linda to earn a 7% return over the 9-year period?