Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her graduation successfully. She will require a return of at least 9% on her stock investments and 4% on bond investments. Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free. Stephanie’s research has allowed her to narrow down on the following investment candidates: Stocks: Pan-Elixir Ltd. is a pharmaceutical company. Its stock is fairly priced. Last year (t = 0), it paid a dividend of $2.50 per share to its shareholders. The company management has estimated that it will be able to maintain a constant growth rate in dividends of 3% per annum. Rebound Tourism Inc. is a travel planning establishment. Its shares sold for an average price of $40 per share last year (t = 0) and the management estimates to maintain a constant growth rate in dividends. Last year, it paid a dividend of $0.50 per share to its shareholders. Cheers Inc. is a beverage producer. It pays a dividend of $1 per share to its shareholders, which is likely to remain constant over an indefinite time period. Think-Local Inc. paid $0.75 per share as dividend last year (t = 0). The company expects that it will take next 2 years (till t = 2) to recover from the pandemic’s effects, during which time, its dividend will grow at a rate of 1.5% per annum. From year 3 onwards, the dividend growth rate is expected to settle at 2% per year indefinitely. Stephanie wants her portfolio to be distributed approximately 5-95 between stocks and bonds such that around 5% (±3%) of her investable funds are allocated to stocks and 95% (±3%) to bonds. Her investment criteria further specify that: i. For all stocks priced below $50, 100 shares each of such stocks be purchased and for stocks priced above $50, 50 shares each should be purchased. Question: How many units of each stock will Stephanie buy? Support your response with relevant computations?
Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her
graduation successfully. She will require a return of at least 9% on her stock investments and 4% on bond investments. Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free.
Stephanie’s research has allowed her to narrow down on the following investment candidates:
Stocks:
Pan-Elixir Ltd. is a pharmaceutical company. Its stock is fairly priced. Last year (t = 0),
it paid a dividend of $2.50 per share to its shareholders. The company management has estimated that it will be able to maintain a constant growth
Rebound Tourism Inc. is a travel planning establishment. Its shares sold for an average
price of $40 per share last year (t = 0) and the management estimates to maintain a
constant growth rate in dividends. Last year, it paid a dividend of $0.50 per share to its
shareholders.
Cheers Inc. is a beverage producer. It pays a dividend of $1 per share to its shareholders,
which is likely to remain constant over an indefinite time period.
Think-Local Inc. paid $0.75 per share as dividend last year (t = 0). The company
expects that it will take next 2 years (till t = 2) to recover from the pandemic’s effects,
during which time, its dividend will grow at a rate of 1.5% per annum. From year 3
onwards, the dividend growth rate is expected to settle at 2% per year indefinitely.
Stephanie wants her portfolio to be distributed approximately 5-95 between stocks and bonds
such that around 5% (±3%) of her investable funds are allocated to stocks and 95% (±3%) to
bonds. Her investment criteria further specify that:
i. For all stocks priced below $50, 100 shares each of such stocks be purchased and for
stocks priced above $50, 50 shares each should be purchased.
Question: How many units of each stock will Stephanie buy? Support your response with relevant
computations?
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