Benny Simpson is considering an investment in Pontoon Industries Inc. He anticipates a dividend of $0.50 next year and an increase in the stock price from the current price of $18.25 per share to $20 per share. If he plans to hold the stock for one year, should Mr Simpson buy the stock if he requires an annual return of 12% on similar-risk investments?

Question

Quizplus · Accepted Answer

To determine the anticipated return, we need to calculate the expected dividend yield and capital gain yield.

Expected dividend yield = Next year's dividend / Current stock price = $0.50 / $18.25 = 2.74% 
Expected capital gain yield = (Expected future price - Current price) / Current price = ($20 - $18.25) / $18.25 = 9.59%

Anticipated return = Dividend yield + Capital gain yield = 2.74% + 9.59% = 12.33%

Since the anticipated return of 12.33% exceeds Mr. Simpson's required return of 12%, he should buy the stock. Thus, the correct answer is option C.

Benny Simpson Is Considering an Investment in Pontoon Industries Inc