Linda Clark received $182,000 from her mother's estate. She placed the funds into the hands of a broker, who purchased the following securities on Linda's behalf:
a. Common stock was purchased at a cost of $103,000. The stock paid no dividends, but it was sold for $163,000 at the end of 3 years.
b. Preferred stock was purchased at its par value of $24,000. The stock paid a 7% dividend (based on par value) each year for 3 years. At the end of 3 years, the stock was sold for $20,000.
c. Bonds were purchased at a cost of $55,000. The bonds paid $3,300 in interest every six months. After 3 years, the bonds were sold for $58,300. (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.)
The securities were all sold at the end of 3 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 18% return, and he gave Linda the following computations to support his statement:
- Common stock:
- Gain on sale ($163,000 - $103,000) $60,000
- Preferred stock:
- Dividends paid (7% × $24,000 × 3 years) 5,040
- Loss on sale ($20,000 - $24,000) (4,000)
- Bonds:
- Interest paid ($3,300 × 6 periods) 19,800
- Gain on sale ($58,300 - $55,000) 3,300
- Net gain on all investments $84,140
Requirement 1
Using a 18% discount rate, compute the net present value of each of the three investments.
A. Common Stock NPV
B. Preferred Stock NPV
C. Bonds NPV
Requirement 2
Linda wants to use the $241,300 proceeds ($163,000 + $20,000 + $58,300 = $241,300) from sale of the securities to open a retail store under a 12-year franchise contract. What annual net cash inflow must the store generate for Linda to earn a 16% return over the 12-year period?