Case 2: A College Student Ponders Investing in the Stock Market

Richard Ford of Athens, GA, has $5000 that he wants to invest in the stock market. Richard is in college on a scholarship and does not plan on needing the $5000 or any dividend income for another 5 years, when he plans to buy a new automobile. Richard is currently considering a stock selling for $25 with an EPS of $1.25. Last year, the company earned $900,000, of which $250,000 was paid out in dividends.

1. What classification of common stock would you recommend to Richard? Why?


2. Calculate the price/earnings ratio and the dividend payout ratio for this stock. Given this information and your recommendation, would this stock be an appropriate purchase for Richard? Why?


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


   

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