Question

Jessica Nekton received $170,000 from her mother's estate. She placed the funds into the hands of a broker, who purchased the following securities on Ms. Nekton's behalf: a cost of $85,000. The stock paid no dividends, but it was sold for a. Common stock was purchased $170.000 at the end of four years. b. Preferred stock was purchased at its par value of $39,000. The stock paid a 9% dividend (based on par value) each year for four years. At the end of four years, the stock was sold for $22,000 c. Bonds were purchased at a cost of $46,000. The bonds paid $4,000 in interest every six months. After four years, the bonds were sold for $75,000. (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.) (lgnore income taxes.) The securities were all sold at the end of four years so that Ms. Nekton would have funds available to start a new business venture. The broker stated that the investments had earned more than a 20% return, nd he gave Ms. Nekton the following computation to support his statement Common stock: Gain on sale ($170, 000 $85,000) Preferred stock: Dividends paid (9% x $39,000 x 4 years) Loss on sale ($22,000 $39,000) Bonds: Interest paid ($4,000 x 8 periods) Gain on sale ($75,000 $46,000) $ 85,000 14,040 (17,000) 32,000 29,000 $143,040 Net gain on all investments $143,040 4 years $170,000 = 21.0% Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables

Answer 1

Using 20% as discount rate the NPV of Common stock is- (3009)/-

Using 20% as discount rate the NPV of Preferred stock is - (9,303.07)/-

Using 20% as discount rate the NPV of Bond is- 11,870.70/-