investments

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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?

  • investments -

    Since 12% of $2.40 and the stock only pays $2.00 a share, this stock doesn't meet Eddy's goal.

  • investments -

    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.

  • investments -

    Another thought -- if the price of the stock increases (and that's a big IF), then it might more than fulfill his goal.

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