What net annual cash inflow must the store generate for ms

Reference no: EM13572058

Jessica Nekton received $150,000 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.	Common stock was purchased at a cost of $75,000. The stock paid no dividends, but it was sold for $170,000 at the end of six years.
b.	Preferred stock was purchased at its par value of $47,000. The stock paid a 8% dividend (based on par value) each year for six years. At the end of six years, the stock was sold for $33,000.
c.	Bonds were purchased at a cost of $28,000. The bonds paid $1,000 in interest every six months. After six years, the bonds were sold for $35,000. (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.) (Ignore income taxes.)

The securities were all sold at the end of six 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 12% return, and he gave Ms. Nekton the following computation to support his statement:


Common stock:
Gain on sale ($170,000 ? $75,000)	$	95,000
Preferred stock:
Dividends paid (8% × $47,000 × 6 years)		22,560
Loss on sale ($33,000 ? $47,000)		(14,000)
Bonds:
Interest paid ($1,000 × 12 periods)		12,000
Gain on sale ($35,000 ? $28,000)		7,000

Net gain on all investments	$	122,560

	$122,560 ÷ 6 years	= 13.6%
	$150,000	= 13.6%

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Required:
1a.	Using a 12% discount rate, compute the net present value of each of the three investments. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate and final answers to the nearest dollar amount.)

	Net Present Value
Common stock	$
Preferred stock	$
Bonds	$

1b.

On which investment(s) did Ms. Nekton earn a 12% rate of return?

	Common stock
	Preferred stock
	Bonds
	None

Considering all three investments together, did Ms. Nekton earn a 12% rate of return?

	Yes
	No

Ms. Nekton wants to use the $238,000 proceeds ($170,000 + $33,000 + $35,000 = $238,000) from sale of the securities to open a fast-food franchise under a 11-year contract. What net annual cash inflow must the store generate for Ms. Nekton to earn a 9% return over the 11-year period?Ms. Nekton will not receive back her original investment at the end of the contract. (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount.)

Reference no: EM13572058

Questions Cloud

If you put up 28000 today in exchange for a 825 percent : if you put up 28000 today in exchange for a 8.25 percent 15-year annuity what will the annual cash flow

The company issues bonds and uses the proceeds to purchase : the contribution format income statement for strickland inc. for its most recent period is given below

Prepare and complete the worksheet below use the : excalibur corporation manufactures and sells video games for personal computers. the unadjusted trial balance as of

Please write your thoughts an reaction about my classmate : please write your thoughts an reaction about my classmate answer. tell if you are agree or not and explain.i find this

What net annual cash inflow must the store generate for ms : jessica nekton received 150000 from her mothers estate. she placed the funds into the hands of a broker who purchased

Fogelberg company purchased equipment for 15000 sales tax : fogelberg company purchased equipment for 15000. sales tax on the purchase was 900. other costs incurred were freight

If a company has a price-earnings ratio of 20 and reports : assume that two companies in the same industry have equal earnings. why might these companies have different

Determine the companys earnings per share on common stock : a company reports the followingnet income ................................. 525000preferred dividends

Determine the net present value of this investment : george grayson will retire in three years. he wants to open some type of small business operation that can be managed

User Account

All Pages