Financial planning cases 14-6 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 $15 per share with an EPS of $1.00. Last year, the company earned $1,000,000, of which $200,000 was paid out in dividends.

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

   -Select-Growth stocksIncome stocksItem 1

   Why?

2. 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?

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

   The input in the box below will not be graded, but may be reviewed and considered by your instructor.

4. 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.