Your father has 500 shares of 'Premier Goods', which is expected to pay a $2.38 dividend per
Question:
Your father has 500 shares of 'Premier Goods', which is expected to pay a $2.38 dividend per share next year. Expected dividend growth rate is 6% per year forever. He also has 600 shares of 'Sunshine Real Estates', which is predicted to have a dividend growth rate of 4% per year forever. 'Sunshine Real Estates' is now selling for $51.875 and is expected to pay a dividend of $3.35 per share next year.
a. If 'Premier Goods' is selling for $29.45 per share, what is the expected return from this investment?
b. Calculate your father's expected return on 'Sunshine Real Estates'.
c. Based on the results in part (a) & (b), can you say that one investment is superior than the other one? If your father prefers to invest in stocks, what is your advice to him? Explain your arguments.
d. Suppose your father also has some bonds, discuss why stocks are normally riskier than bonds. Is it good or bad?
Fundamentals of Corporate Finance
ISBN: 978-1292018409
3rd edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford