Question - Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, four years ago she paid $26,000 for 910 shares of Malti Company's common stock. She received a $637 cash dividend on the stock at the end of each year for four years. At the end of four years, she sold the stock for $22,400. Kathy would like to earn a return of at least 10% on all of her investments. She is not sure whether the Malti Company stock provided a 10% return and would like some help with the necessary computations. (Ignore income taxes.)
To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.
Required:
(a) Determine the net present value.
(b) Did Kathy earn a 10% return on the Malti Company stock?