Question
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
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 $2,500 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 | $28.50 | $39.60 | ||
Current earnings per share (EPS) | $1.90 | $2.20 | ||
Current quarterly cash dividend | $0.16 | $0.20 | ||
Current P/E ratio | 15 | 18 | ||
Projected earnings annual growth rate | 25 | % | 25 | % |
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 $2.38 with a dividend of $0.70, and the EPS for Eagle Packaging will be $2.75 with a projected dividend of $0.88.)
1. 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 | % | % |
2. Assume that the beta is 2.2 for Running Paws and 2.9 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 | $ | $ |
3. 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 | % | % | % |
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