Question

# Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate...

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 \$23,500 for 1,030 shares of Malti Company’s common stock. She received a \$917 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 \$21,000. Kathy would like to earn a return of at least 8% on all of her investments. She is not sure whether the Malti Company stock provided a 8% return and would like some help with the necessary computations.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net present value that Kathy earned on her investment in Malti Company stock.

2. Did the Malti Company stock provide a 8% return?

Ans:

Purchase Price : \$23,500

Dividend per year : \$917

Time Period : 3 Years

Sale Value : \$21,000

Rate : 8%

Annuity Factor @8% for 3 Years : 2.57710 (Using factor table)

NPV Factor @8% for 3 Years : 0.79383 (Using factor table)

Present Value of Inflows : Annuity Factor*Dividend per year + NPV Factor*Sale Value

= 2.57710*\$917 + 0.79383*\$21,000

= \$19,034

a.

Net Present value of Investment : \$19,034 - \$23,500 = (\$4,466)

b.

Since net present value of Investment is Negative, Malti company didn't provide 8% return.