Problem 11-25A Net Present Value Analysis of Securities [LO11-2] Linda Clark rec
ID: 2785682 • Letter: P
Question
Problem 11-25A Net Present Value Analysis of Securities [LO11-2]
Linda Clark received $200,000 from her mother’s estate. She placed the funds into the hands of a broker, who purchased the following securities on Linda’s behalf:
Common stock was purchased at a cost of $110,000. The stock paid no dividends, but it was sold for $190,000 at the end of three years.
Preferred stock was purchased at its par value of $42,000. The stock paid a 4% dividend (based on par value) each year for three years. At the end of three years, the stock was sold for $28,000.
Bonds were purchased at a cost of $69,000. The bonds paid annual interest of $3,000. After three years, the bonds were sold for $74,000.
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 14% return, and he gave Linda the following computations to support his statement:
$200,000
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Exhibit 11B-1 LINK http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG
Exhibit 11B-2 LINK http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG
Using a 14% discount rate, compute the net present value of each of the three investments. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)
On which investment(s) did Linda earn a 14% rate of return? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)
Linda Clark received $200,000 from her mother’s estate. She placed the funds into the hands of a broker, who purchased the following securities on Linda’s behalf:
Explanation / Answer
item Now 1 2 3 Common Stock: Purchase of the stock -110000 Sale of the stock 190000 Total cash flows -110000 190000 Discount factor 1 0.877192982 0.674971516 0.769467528 Present Value -110000 0 0 146198.8304 Net present calue 36198.83041 Preferred Stock: Purchase of the stock -42000 Annual cash dividend 1680 1680 1680 Sale of the stock 28000 Total cash flows -42000 1680 1680 29680 Discount factor 1 0.877192982 0.674971516 0.769467528 Present value -42000 1473.684211 1133.952147 22837.79624 Net present value -16554.5674 Bonds: Purchase of the bonds -69000 Annual interest income 3000 3000 3000 Sale of the bonds 74000 Total Cash flows -69000 3000 3000 77000 Discount factor 1 0.877192982 0.674971516 0.769467528 Present value -69000 2631.578947 2024.914549 59248.99969 Net present value -5094.506812 1(b) Rate of returrn = IRR stock 20% preferred stock -8% bonds 7% (u can either use irr function of calculate using outflow = inflow) Over all return Investment Weight(II/Total Investment) Return weight x Return stock 110000/221000= 0.497737557 20% 9.95% preferred stock 42000/221000 0.190045249 -8% -1.52% bonds 69000/221000 0.312217195 7% 2.19% 10.62% Total investment by broker = 110000+42000+69000 221000 Total return = 10.62% less then 14% Please provide feedback…. Thanks In advance :-)