Linda Clark received $175,000 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 $95,000. The stock paid no dividends, but it was sold for $160,000 at the end of three years.
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| b. |
Preferred stock was purchased at its par value of $30,000. The stock paid a 6% dividend (based on par value) each year for three years. At the end of three years, the stock was sold for $27,000.
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| c. |
Bonds were purchased at a cost of $50,000. The bonds paid $3,000 in interest every six months. After three years, the bonds were sold for $52,700. (Note: In discounting a cash flow that occurs semiannually, the procedure is to halve the discount rate and double the number of periods. Use the same procedure in discounting the proceeds from the sale.)
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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 16% return, and he gave Linda the following computations to support his statement:
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| Common stock: |
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| Gain on sale ($160,000 - $95,000) |
$65,000 |
| Preferred stock: |
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| Dividends paid (6% × $30,000 × 3 years) |
5,400 |
| Loss on sale ($27,000 - $30,000) |
(3,000) |
| Bonds: |
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| Interest paid ($3,000 × 6 periods) |
18,000 |
| Gain on sale ($52,700 - $50,000) |
2,700 |
| Net gain on all investments |
$88,100
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$88,100 3 years
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= 16.8% |
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$175,000 |
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To determine the appropriate discount factor(s) using tables, click here to view Exhibit 13B-1 and Exhibit 13B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.
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| Requirement 1: |
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Using a 16% discount rate, compute the net present value of each of the three investments. (Round your answers to the nearest dollar amount. Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)
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Net present value |
| Common stock |
$ |
| Preferred stock |
$ |
| Bonds |
$ |
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| Requirement 2: |
| Considering all three investments together, did Linda earn a 16% rate of return? |
(Click to select)YesNo |
| Requirement 3: |
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Linda wants to use the $239,700 proceeds ($160,000 + $27,000 + $52,700 = $239,700) from sale of the securities to open a retail store under a 12-year franchise contract. What annual net cash inflow must the store generate for Linda to earn a 14% return over the 12-year period? (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
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