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Industries—a highly regarded growth stock that Wally is disenchanted
with because of recent substandard performance.
Questions
a. How would you describe Wally’s present investment program?
How do you think it fits him and his investment objectives?
b. Consider the Hydro-Electric stock.
1. Determine the amount of annual dividends Hydro-Electric
can be expected to pay over the years 2016 to 2020.
2. Compute the total dollar return that Wally will make from
Hydro-Electric if he invests $6,000 in the stock and all the
dividend and price expectations are realized.
3. If Wally participates in the company’s dividend reinvestment
plan, how many shares of stock will he have by the end of
2020? What will they be worth if the stock trades at $80 on
December 31, 2020? Assume that the stock can be purchased
through the dividend reinvestment plan at a net price of $50 a
share in 2016, $55 in 2017, $60 in 2018, $65 in 2019, and
$70 in 2020. Use fractional shares, to 2 decimals, in your
computations. Also, assume that, as in part b, Wally starts
with 100 shares of stock and all dividend expectations are
realized.
c. Would Wally be going to a different investment strategy if he
decided to buy shares in Hydro-Electric? If the switch is made,
how would you describe his new investment program? What do
you think of this new approach? Is it likely to lead to more trading
on Wally’s behalf? If so, can you reconcile that with the limited
amount of time he has to devote to his portfolio?