Exercise 14-10 (Algo) Net Present Value Analysis [LO14-2] Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return she is earning. For example, three years ago she paid $17,000 for 910 shares of Malti Company's common stock. She received a cash dividend of $701 on the stock at the end of each year for three years. At the end of three years, she sold the stock for $16,000. Kathy would like to earn a return of at least 9% on all of her investments. She is not sure whether the Malti Company stock provides a 9% return and would like some help with the necessary computations. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value Kathy earned on her investment in Malti Company stock. 2. Did the Malti Company stock provide a 9% return?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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Exercise 14-10 (Algo) Net Present Value Analysis [LO14-2]
Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return she is earning. For
example, three years ago she paid $17,000 for 910 shares of Malti Company's common stock. She received a cash dividend of $701 on
the stock at the end of each year for three years. At the end of three years, she sold the stock for $16,000. Kathy would like to earn a
return of at least 9% on all of her investments. She is not sure whether the Malti Company stock provides a 9% return and would like
some help with the necessary computations.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net present value Kathy earned on her investment in Malti Company stock.
2. Did the Malti Company stock provide a 9% return?
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Required 1 Required 2
Compute the net present value Kathy earned on her investment in Malti Company stock.
Note: Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount.
Net present value
Required 1
Required 2 >](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe6069db0-f496-4c11-99c9-1e809a876661%2Fd2af592b-7424-46de-a4ab-d27fe6318513%2Fyqdwyne_processed.jpeg&w=3840&q=75)
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