A College Student Ponders Investing in the Stock Market

Ji Wu of Troy, New York, has $5,000 that he wants to invest in the stock market. Ji is in college on a scholarship and does not plan to use the $5,000 or any dividend income for another five years, when he plans to buy a home. He is currently considering a small company stock selling for $30 per share with an EPS of $1.50. Last year, the company earned $800,000, of which $200,000 was paid out in dividends.

Review Table 14-1. What classification of common stock would you recommend to Ji?

-Select-Growth stocksIncome stocksItem 1

Why?

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Calculate the P/E ratio and the dividend payout ratio for this stock. Round your answers to the nearest whole number.

P/E ratio Dividend payout ratio %

Given this information and your recommendation, would this stock be an appropriate purchase for Ji? Why or why not?

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Identify the components of the total return Ji might expect, and estimate how much he might expect annually from each component.

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Review the section titled Evaluate Stocks Using Corporate Earnings and select two that you think Ji would utilize to evaluate when investing in stocks. Explain why.

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