Question

Your bank account pays an interest rate of 8 percent. You are considering buying a share of stock in XYZ Corporation for $110. After 1, 2, and 3 years, it will pay a dividend of $5. You expect to sell the stock after 3 years for $120. Is XYZ a good investment

Answer 1

Answer:

XYZ is not a good investment as compared to Bank because it has lower per year interest than the bank.

Explanation:

Bank offers 8% per year

To compare the investment we should calculate the holding period return of the share which is as follows

Holding period return = ( Dividend + Change in price ) / Initial price )

Holding period return =  ( $5 +($120 - 110) ) / $110 ) = ( $5 + $10 ) / $110 = 0.1364 =  13.64%

Return per year = 13.64% / 3 = 4.5% per year