Justin bought a share of common stock issued by DOOGLE for 100 dollars. It is kn

Question

Justin bought a share of common stock issued by DOOGLE for 100 dollars. It is known that DOOGLE’s last dividend payment is 10 dollars per share, and DOOGLE promises to increase dividend by 5 percent every year. Harper bought a share of common stock issued by Macrohard for 50 doolars. Microhard’s last dividend is 6 dollars per share, and promises no dividend growth in the future. Now both Justin and Harper go to an auction for a 30-year government of Canada bond with $123,456 face value and a 10% coupon, who will offer a higher bid

Explanation / Answer

Rate of return on Doodle Stock = [$10 × (1 + 5%) / $100] + 5%

= ($10.50 / $100) + 5^

= 10.50% + 5%

= 15.50%

Return provided by Doodle stock si 15.50%.

Return provided by Macrohard Stock = $6 / $50

= 12%

Return provided by Macrohard stock is 12%.

Coupon rate on government of Canada bond = 10%.

So, Coupon rate on government of Canada bond is 10%.

So, by comparing all three return, Doodle stock provide highest among all three investment.

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