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Jennifer is looking to make an investment.   She has $2,000 and is considering either a stock...

Jennifer is looking to make an investment.   She has $2,000 and is considering either a stock or bond. The stock costs $150 and has a dividend of 2.5%. she believes the stock will appreciate in value of 5% per year.   The bond on the other hand, has a rate of 6% and a cost of 95.   Provide the value of each after one year and explain to me which one Jennifer should select and why,

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Answer #1

Stock

Stock cost = $150

Number of stocks she can buy = 2000 / 150 = 13.33

dividend = 2.5% or 2.5%*150 = $3.75

Capital gain = 5%*150 = 7.5

Total gain = dividend plus capital gain = 3.75 + 7.5 = $11.25 for 1 stock

Therefore, for 13.33 stocks , total gains = 11.25 * 13.33 = $150

After 1 year value from stock = 2000 + 150 = $2150

Bond

Cost = 95

interest rate = 6%

Number of bonds = 2000 / 95 = 21.05263

Interest per bond = 6% * 95 = $5.70

Total Interest earned = 21.05263 * 5.70 = $120

After 1 year value from bond = 2000 + 120 = $2120

Therefore, Jennifer should select stock as the dividend plus capital gains yield is higher than the interest paid on the bond.

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