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Case Problem 6.1 Sara Decides to Take the Plunge
Sara Thomas is a child psychologist who has built a thriving practice in
her hometown of Boise, Idaho. Over the past several years she has been
able to accumulate a substantial sum of money. She has worked long and
hard to be successful, but she never imagined anything like this. Even so,
success has not spoiled Sara. Still single, she keeps to her old circle of
friends. One of her closest friends is Terry Jenkins, who happens to be a
stockbroker and who acts as Sara’s financial advisor.
Not long ago Sara attended a seminar on investing in the stock market,
and since then she’s been doing some reading about the market. She has
concluded that keeping all of her money in low-yielding savings
accounts doesn’t make sense. As a result, Sara has decided to move part
of her money to stocks. One evening, Sara told Terry about her decision
and explained that she had found several stocks that she thought looked
“sort of interesting.” She described them as follows:
·
North Atlantic Swim Suit Company. This highly speculative
stock pays no dividends. Although the earnings of NASS have been a bit
erratic, Sara feels that its growth prospects have never been brighter—
“what with more people than ever going to the beaches the way they are
these days,” she says.
·
Town and Country Computer. This is a long-established
computer firm that pays a modest dividend yield (of about 1.50%). It is
considered a quality growth stock. From one of the stock reports she
read, Sara understands that T&C offers excellent long-term growth and
capital gains potential.
·
Southeastern Public Utility Company. This income stock pays
a dividend yield of around 5%. Although it’s a solid company, it has
limited growth prospects because of its location.
·
International Gold Mines, Inc. This stock has performed quite
well in the past, especially when inflation has become a problem. Sara
feels that if it can do so well in inflationary times, it will do even better
in a strong economy. Unfortunately, the stock has experienced wide
price swings in the past. It pays almost no dividends.