Question

Linda Clark received 175,000 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 95,000 . The stock paid no dividends, but it was sold for 160,000 at the end of three years. b. Preferred stock was purchased at its par value of 30,000 . The stock paid a 6% dividend (based on par value) the following year for three years. At the end of three years, the stock was sold for 27,000 . c. Bonds were purchased at a cost of 50,000 . The bonds paid 3,000 in interest every six months. After three years, the bonds were sold for 52,700. (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 three 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 16% return, and he gave Linda the following computations to support his statement:
(b) Considering all three investments together, did Linda earn a 16% rate of return? Explain.

Answer 1

Yes, Linda earns a 16% rate of return.

To support this statement, calculations are provided below:

Common stock

Gain on sale ($160,000 - $95,000)

                      = $ 65,000

Preferred stock

Dividends paid (6% x $30,000 x 3 years)

                          = 5,400

Loss on sale ($27,000 - $30,000)

                     = 3,000

Bonds:

Interest paid - ($ 6,000 x 3 years)

                       = 18,000

Gain on sale - ($52,700 - $50,000)

                       = 2,700

Net gain on all investments - $88,100

= $88,100 / 3 years / $175,000 = 16.8%

What do you mean by the term investments?

A purchase made with the intention of creating income or capital growth is known as an investment. An asset's value increasing over time is referred to as appreciation. When a person invests in a good, they do not intend to utilize it as a source of immediate consumption, but rather as a tool for future wealth creation. An investment always entails the expenditure of some capital—time, effort, money, or an asset—today with the expectation of a future return higher than the initial investment. For instance, an investor might buy a financial asset right away with the hope that it would provide income later on or that it can be sold for a profit at a higher price.

To learn more about Investments, visit:

brainly.com/question/14682309

#SPJ4