FIN 1103-3 FIN1103-3 Individual Week 11-1

FIN 1103-3 Individual Week 11 Part 1

2.  An investor is thinking about buying some shares of Razortronics, Inc., at $75 a share. She expects the price of the stock to rise to $115 a share over the next three years. During that time, she also expects to receive annual dividends of $4 per share. Assuming that the investor’s expectations (about the future price of the stock and the dividends that it pays) hold up, what rate of return can the investor expect to earn on this investment? (Hint: Use either the approximate yield formula or a financial calculator to solve this problem.)

3. The price of Garden Designs, Inc. is now $85. The company pays no dividends. Sean Perth expects the price four years from now to be $125 a share. Should Sean buy Garden Designs if he wants a 15 percent rate of return? Explain.

5. An investor in the 28 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U. S. Treasury bond selling at par; the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of these two bonds should the investor select? Why?