Chapter 8 Exercise 4: Cash flow calculations and net present value
On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends of $2.60 per share in 20X1 and 20X2; the dividend was raised to $3.10 per share in 20X3. On December 31, 20X3, Greene sold his holdings and generated proceeds of $13,000. Greene uses the net-present- value method and desires a 16% return on investments.
- a. Prepare a chronological list of the investment's cash flows. Note: Greene is entitled to the 20X3 dividend.
- b. Compute the investment's net present value, rounding calculations to the nearest dollar.
- c. Given the results of part (b), should Greene have acquired the Heartland stock? Briefly explain.