posted by kenny
eddy is considering a stock purchase. the stock pays constant annual dividend of $2.00 per share, and is currently trading at $20 . Eddy's required rate of return for this stock is 12%. should he buy this stock?
Since 12% of $2.40 and the stock only pays $2.00 a share, this stock doesn't meet Eddy's goal.
2/20 = 10%
It better go up by 2% a year :)
2/x = .12
x = 2/.12 = 16 2/3
If he wants 12% in dividends, he better not pay any more than 16.67 dollars for the stock.
Another thought -- if the price of the stock increases (and that's a big IF), then it might more than fulfill his goal.