Robert Pang, and his wife Jean have 50K to invest. They will need the money at retirement in 10 years. They are considering 2 investments. The first a utility company common stock that costs $50 per share and pays dividends of $2 per share per year (a 4% dividend yield). They did not expect the value of this stock to increase. The other investment under consideration is higly rated corporate bond that currently sells at par in 1,000 increments, and pays annual interest at a rate of 5%, or $50 per 1,000 invested. Assume that the Pangs keep the income from their investments but do not reinvest it. They will however, need to pay income taxes on their investment income. They will set the stock after 10 years if they buy it. If they buy the bonds, in 10 years they will get back in the amount they invested. They are in the 33% tax bracket.
a) How many shares of the stock can the Pangs buy?
b) How much will they receive each year in dividend income if they buy stock, after taxes?
c) What is the total amount they would have from their original 50,000 if they purchased the stock and it all went as planned?
d) How much will they receive each year in interest if they purchase the bonds, after taxes.
e) What is the total amount they would have from their original 50,000 if they purchased the bonds and all went as planned?
f) Based only on your calculations and ignoring other risk factors, should they buy the stock or the bonds.
This solution shows step-by-step calculations in an Excel file to determine number of stock purchase, dividend income, total amount received, and it also provides a recommendation if the Pangs should buy the stock or bonds.