Investment Calculations. Xiao and Shiao Jing-jian, newlyweds from Laramie, Wyoming, have decided to begin investing for the future. Xiao is a 7-Eleven store manager, and Shiao is a high-school math teacher.

The couple intends to take $3,000 out of their savings for investment purposes and then continue to invest an additional

$200 to $400 per month. Both have a moderate investment philosophy and seek some cash dividends as well as price appreciation.

Calculate the five-year return on the investment choices in the table below. Put your calculations in tabular form like that shown in Table 14-2. (Hint: When making your calculations you should assume at the end of the first year. At the end of the first year the EPS for Running Paws will be $2.40 with a dividend of $0.66, and the EPS for Eagle Packaging will be $2.76 with a projected dividend of $0.86.)

(a) Using the appropriate P/E ratios, what are the estimated market prices of the Running Paws and Eagle Packaging stocks after five years?

(b) Show your calculations in determining the projected price appreciations for the two stocks over the five years.

(c) Add the projected price appreciation of each stock to its projected cash dividends, and show the total five-year percentage returns for the two stocks.

(d) Determine the average annual dividend for each stock, and use these figures in calculating the approximate compound yields for each.

(e) Assume that the beta is 2.5 for Running Paws and 2.8 for Eagle Packaging. If the market went up 20 percent during the year, what would be the likely stock prices for Running Paws and Eagle Packaging?

(f) Assume that inflation is approximately 4 percent and the return on high-quality, long-term, corporate bonds is 8 percent. Given the Jing-jians’ investment philosophy, explain why you would recommend

(1) Running Paws,

(2) Eagle Packaging, or (3) a high-quality, long-term corporate bond as a growth investment.

Support your answer by calculating the potential rate of return using the information on pages 432–435; or by using the Garman/Forgue website. The Jing-jians are in the 25 percent marginal tax bracket.

Running Paws Eagle Packaging Current price $30.00 $48.00 Current earnings per share (EPS)

$ 2.00 $ 2.30 Current quarterly cash dividend

$ 0.15 $ 0.18 Current P/E ratio 15 21 Projected earnings annual growth rate 20% 20%

Projected cash dividend growth rate 10% 10%

AppendixLO1