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 $4,000 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.

	Running Paws		Eagle Packaging
Current price	$27.00		$60.00
Current earnings per share (EPS)	$1.80		$2.50
Current quarterly cash dividend	$0.16		$0.17
Current P/E ratio	15		24
Projected earnings annual growth rate	15%		15%
Projected cash dividend growth rate	10%		10%

(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 $2.07 with a dividend of $0.70, and the EPS for Eagle Packaging will be $2.88 with a projected dividend of $0.75)

a) Using the appropriate P/E ratios, what are the estimated market prices of the Running Paws and Eagle Packaging stocks after five years? Do not round intermediate calculations. Round your answers to the nearest cent.

	Running Paws	Eagle Packaging
Estimated market price	$	$

b) Show your calculations in determining the projected price appreciations for the two stocks over the five years. Round your answers and intermediate calculations to the nearest cent. The price appreciation for Running Paws would be

$ -Select-minusplus $ = $

The price appreciation for Eagle Packaging would be $ -Select-minusplus $ = $

c) Determine the average annual dividend for each stock, and use these figures in calculating the approximate compound yields for each. Round your answers for average annual dividend to the nearest cent and answers for compound yield to two decimal places.

	Running Paws	Eagle Packaging
Average annual dividend	$	$
Compound yield	%	%

e)

Assume that the beta is 2.6 for Running Paws and 2.8 for Eagle Packaging. If the market went up by 17 percent during the year, what would be the likely stock prices for Running Paws and Eagle Packaging? Round your answers to the nearest cent.

	Running Paws	Eagle Packaging
Stock price	$	$

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 which investment alternative you would recommend: (1) Running Paws, (2) Eagle Packaging, or (3) a high-quality, long-term corporate bond, or (4) other growth investment. Support your answer by calculating the potential rate of return using the provided information or by using the Garman/Forgue website. The Jing-jians are in the 25 percent marginal tax bracket. Round your answers to two decimal places.

	Running Paws	Eagle Packaging	Bond
Growth return	%	%	%
After-tax return	%	%	%
Potential rate of return	%	%	%

Jing-jians should choose .