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Case Study Questions

The analysis that Earl has laid out has the following questions. Can you answer them for him for both choices?

$1.$ What is the overall rate of return after $12$ years? $2.$ If he decided to sell the stock or bond immediately after the fifth annual dividend, what is his minimum selling price to realize

a $7\%$ real return? Include an adjustment of $4\%$ per year for inflation. $3.$ If Earl needed some money in the future, say, immediately after the fifth dividend payment, what would be the minimum selling price in future dollars, if he were only interested in recovering an amount that maintained the purchasing power of the

original price? $4.$ As a follow$-$on to question $3,$ what happens to the selling price $($in future dollars$)5$ years after purchase, if Earl is willing to remove $($net out$)$ the future purchasing power of each of the dividends in the computation to determine the required selling

price $5$ years hence? $5.$ Earl plans to keep the stocks or bonds for $12$ years, that is$,$ until the bond matures. However, he wants to make the $7\%$ per year real return and make up for the expected $4\%$ per year inflation. For what amount must he sell the stocks after $12$ years, or buy the bonds now, to ensure he realizes this return? Do these amounts seem reasonable to you, given your knowledge of the way

that stocks and bonds are bought and sold?

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