Question

Linda Clark received $223,000 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 $99,000. The stock paid no dividends, but it was sold for $161,000 at the end of three years.b. Preferred stock was purchased at its par value of $54,000. 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 $39,000.c. Bonds were purchased at a cost of $70,000. The bonds paid annual interest of $1,500. After three years, the bonds were sold for $86,000.

Answer 1

Question:

With a discount rate of 11% solve for the net present value:

Answer:

A) NPV 18,721.81

B) NPV -17.565,93

C) NPV -3.451,97‬

Step-by-step explanation:

a) we use the lump sum present value formula and then, compare against the cost.

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $161,000.00

time 3.00

rate 0.11000

`(161000)/((1 + 0.11)^(3) ) = PV`

PV 117,721.8124

117,721.81 - 99,000 = 18,721.81

b) We solve forthe present value of the annuity of dividends and the lump sum of the sale price.

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $39,000.00

time 3.00

rate 0.11000

`(39000)/((1 + 0.11)^(3) ) = PV`

PV 28,516.4639

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 3,240.00

time 3

rate 0.11

`3240 * (1-(1+0.11)^(-3) )/(0.11) = PV\\`

PV $7,917.6357

Net present value

28,516.43 + 7,917.64 - 54,000 = -17.565,93

C) We solve forthe present value of the annuity of dividends and the lump sum of the sale price.

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 1,500.00

time 3

rate 0.11

`1500 * (1-(1+0.11)^(-3) )/(0.11) = PV\\`

PV $3,665.5721

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $86,000.00

time 3.00

rate 0.11000

`(86000)/((1 + 0.11)^(3) ) = PV`

PV 62,882.4588

62,882.46 + 3,665.57 - 70,000 = -3.451,97‬

Answer 2

Step-by-step explanation:

check attached files below for explanation..