If inefficiency exists somewhere in a corporation that does

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Reference no: EM13573338

Anita Vasquez received $130,000 from her mother's estate. She placed the funds into the hands of a broker, who purchased the following securities on Anita's behalf:

a.	Common stock was purchased at a cost of $65,000. The stock paid no dividends, but it was sold for $150,000 at the end of four years.
b.	Preferred stock was purchased at its par value of $18,000. The stock paid a 8% dividend (based on par value) each year for four years. At the end of four years, the stock was sold for $13,500.
c.	Bonds were purchased at a cost of $47,000. The bonds paid $2,820 in interest every six months. After four years, the bonds were sold for $53,000.

The securities were all sold at the end of four years so that Anita would have funds available to start a new business venture. The broker stated that the investments had earned more than a 22% return, and he gave Anita the following computation to support his statement:


Common stock:
Gain on sale ($150,000 - $65,000)	$	85,000
Preferred stock:
Dividends paid (8% × $18,000 × 4 years)		5,760
Loss on sale ($13,500 - $18,000)		(4,500)
Bonds:
Interest paid ($2,820 × 8 periods)		22,560
Gain on sale ($53,000 - $47,000)		6,000

Net gain on all investments	$	114,820

	$114,820 ÷ 4 years	= 22.1%
	$130,000	= 22.1%

Required:
1a.	Using a 22% discount rate, compute the net present value of each of the three investments.

	Net Present Value
Common stock	$
Preferred stock	$
Bonds	$

1b.

On which investment did Anita earn a 22% rate of return?

	Common stock
	Preferred stock
	Bonds
	None

Considering all three investments together, did Anita earn a 22% rate of return?

	Yes
	No

Anita wants to use the $216,500 proceeds from sale of the securities to open a fast-food franchise under a 10-year contract. What net annual cash inflow must the store generate for Anita to earn a 14% return over the 10-year period? Assume that the project will yield same annual cash inflow each year. Anita will not receive back her original investment at the end of the contract.

Annual net cash inflow

Reference no: EM13573338

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