Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her graduation successfully. She is a fresh finance graduate and is excited to invest some money in the capital market, for which she intends to use the gifted sum of $50,000. However, instead of committing this money to the market immediately, she decides to wait for some time, work in the field and acquire some experience before proceeding with her intended investment. She thus contemplates an extremely conservative investment in a portfolio of stocks and bonds, at the start of year 5 from now. For now, she will leave the $50,000 in a fixed deposit with the bank which promises an interest rate of 6% per annum. She will require a return of at least 9% on her stock investments and 4% on bond investments. Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free. Stephanie’s research has allowed her to narrow down
Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her
graduation successfully. She is a fresh finance graduate and is excited to invest some money in
the capital market, for which she intends to use the gifted sum of $50,000. However, instead
of committing this money to the market immediately, she decides to wait for some time, work
in the field and acquire some experience before proceeding with her intended investment. She
thus contemplates an extremely conservative investment in a portfolio of stocks and bonds, at
the start of year 5 from now. For now, she will leave the $50,000 in a fixed deposit with the
bank which promises an interest rate of 6% per annum.
She will require a return of at least 9% on her stock investments and 4% on bond investments.
Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free.
Stephanie’s research has allowed her to narrow down on the following investment candidates:
Stocks:
1. Pan-Elixir Ltd. is a pharmaceutical company. Its stock is fairly priced. Last year (t = 0),
it paid a dividend of $2.50 per share to its shareholders. The company management has
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estimated that it will be able to maintain a constant growth rate in dividends of 3% per
annum.
2. Rebound Tourism Inc. is a travel planning establishment. Its shares sold for an average
price of $40 per share last year (t = 0) and the management estimates to maintain a
constant growth rate in dividends. Last year, it paid a dividend of $0.50 per share to its
shareholders.
3. Cheers Inc. is a beverage producer. It pays a dividend of $1 per share to its shareholders,
which is likely to remain constant over an indefinite time period.
4. Think-Local Inc. paid $0.75 per share as dividend last year (t = 0). The company
expects that it will take next 2 years (till t = 2) to recover from the pandemic’s effects,
during which time, its dividend will grow at a rate of 1.5% per annum. From year 3
onwards, the dividend growth rate is expected to settle at 2% per year indefinitely.
Question:
How many units of each stock will Stephanie buy? Support your response with relevant
computations.
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