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 $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?

Answer 1

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.

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