Question

Give solution with full details. I need step by step solution.

Carty’s Choices Brian Carty, a prominent investor, is evaluating investment alternatives. If he believes an individual equity will rise in price from $59 to $71 in the coming one-year period, and the share is expected to pay a dividend of $1.75 per share, and he expects at least a 15% rate of return on an investment of this type, should he invest in this particular equity? Please explain.

Answer 1

To find out if the stock select by Brian Carty is worth investing or not we need to find its expected return and then we will compare it with the required arte of return 15%, if the stock return is less than 15% Carty should not invest in the stock.

So let’s fin out

Stock return = [(maturity price – invested price) + dividend] / invested price

Where,

              Stock price at year end or maturity price = $71

            Beginning price or invested price = $59

               Dividend received in between = $1.75

Lest put all the values in the formula

Stock return = [(71 – 59) + 1.75]/59

                       = [12 + 1.75]/59

                       = 13.75/ 59

                       = 0.23305 or 23.31%

Stock return is higher than required return (15%) so Brian should invest in the stock.

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