suggests that Wally seriously consider putting some of his money into income shares to capture the high dividend yields that are available. After all, as Al says, ― the bottom line is not so much where the payoff comes from as how much it amounts to!‖ They then talk about a highyield public utility stock, Hydro-Electric Light and Power. Al digs up some forecast information about Hydro-Electric and presents it to Wally for his consideration: The stock currently trades at $ 60 per share. Al thinks that within five years it should be trading at $ 75 to $ 80 a share. Wally realizes that to buy the Hydro-Electric stock, he will have to sell his holdings of CapCo 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?