Linda Clark received $ from her mothers estate. She placed the funds into the hands of a broker, who purchased the following securities on Lindas behalf:
a Common stock was purchased at a cost of $ The stock paid no dividends, but it was sold for $ at the end of three years.
b Preferred stock was purchased at its par value of $ The stock paid a dividend based on par value each year for three years. At the end of three years, the stock was sold for $
c Bonds were purchased at a cost of $ The bonds paid annual interest of $ After three years, the bonds were sold for $
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 return, and he gave Linda the following computations to support his statement:
Common stock:
Gain on sale $ $ $
Preferred stock:
Dividends paid times $times years
Loss on sale $ $
Bonds:
Interest paid $times years
Gain on sale $ $
Net gain on all investments $
$: years: $
Click here to view Exhibit B and Exhibit B to determine the appropriate discount factors using tables.
Required:
a Using a discount rate, compute the net present value of each of the three investments.
b On which investments did Linda earn a rate of return?
Considering all three investments together, did Linda earn a rate of return?
Linda wants to use the $ proceeds $ $ $ $ from sale of the securities to open a retail store under a year franchise contract. What minimum annual net cash inflow must the store generate for Linda to earn a return over the year period?
