Richard Ford of Jeff erson City, Tennessee, has $5000 that he wants to invest in the stock market. Richard is in college on a scholarship and does not plan to use the $5000 or any dividend income for another fi ve years, when he plans to buy a home.

He is currently considering a stock selling for $25 per share with an EPS of $1.25. Last year, the company earned $900,000, of which $250,000 was paid out in dividends.

(a) What classifi cation of common stock would you recommend to Richard? Why?

(b) Calculate the P/E ratio and the dividend payout ratio for this stock. Given this information and your recommendation, would this stock be an appropriate purchase for Richard? Why or why not?

(c) Identify the components of the total return Richard might expect, and estimate how much he might expect annually from each component.