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Item 2

Item 2 6 points

Linda Clark received $227,000 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 $97,000. The stock paid no dividends, but it was sold for $166,000 at the end of three years.

b. Preferred stock was purchased at its par value of $52,000. 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 $37,000.

c. Bonds were purchased at a cost of $78,000. The bonds paid annual interest of $4,500. After three years, the bonds were sold for $83,000.

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 11% return, and he gave Linda the following computations to support his statement:

Common stock:
Gain on sale ($166,000 $97,000)	$	69,000
Preferred stock:
Dividends paid (4% $52,000 3 years)		6,240
Loss on sale ($37,000 $52,000)		(15,000	)
Bonds:
Interest paid ($4,500 3 years)		13,500
Gain on sale ($83,000 $78,000)		5,000
Net gain on all investments	$	78,740

$78,740 3 years	= 11.60 %
$227,000

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1-a. Using a 11% discount rate, compute the net present value of each of the three investments.

1-b. On which investment(s) did Linda earn a 11% rate of return?

2. Considering all three investments together, did Linda earn a 11% rate of return?

3. Linda wants to use the $286,000 proceeds ($166,000 + $37,000 + $83,000 = $286,000) from sale of the securities to open a retail store under a 9-year franchise contract. What minimum annual net cash inflow must the store generate for Linda to earn a 8% return over the 9-year period?