Question

Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $27,000 for 1,010 shares of Malti Company’s common stock. She received a $879 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $25,000. Kathy would like to earn a return of at least 7% on all of her investments. She is not sure whether the Malti Company stock provided a 7% return and would like some help with the necessary computations. (Ignore income taxes.)

Answer 1

In this case net present value of investment using discount rate of 7% would be calculated to determine whether company's stock provides 7% return
Calculate net present value of investment
Year	Cash flow	Discount factor @ 7%		Present value
0	-$27,000	1.00000	1/(1.07^0)	-$27,000.00
1	$879	0.93458	1/(1.07^1)	$821.50
2	$879	0.87344	1/(1.07^2)	$767.75
3	$879	0.81630	1/(1.07^3)	$717.53
3	$25,000	0.81630	1/(1.07^3)	$20,407.45
				-$4,285.78
The net present value is negative which means Kathy's stock investment is not providing return of 7%