CBG Corporation has $500,000 in a bank account paying 0.35% annual interest. As

Question

CBG Corporation has $500,000 in a bank account paying 0.35% annual interest. As an alternative to leaving the money in the account, the company is considering investing the entire amount for five years. Five possible investments have been identified as shown below.

Investment D is ten thousand shares of common stock which costs $50 per share and recently paid an annual dividend of $4.25 per share. The company has been increasing earnings and dividends at an average annual rate of 4%. The current market rate of return on similar common stock is 12%.

Explanation / Answer

Hi,

Please find the correct answer as follows:

for investment D,

Price of stock = 4.25*(1+4%)/(12%-4%)

=55.25

Since the price is coming out to be 55.25 which is greater than $50 (current price). it should not invest in investment D

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