CASE PROBLEM

6.2
Wally Wonders Whether There’s a
Place for Dividends
Members: Catherine Joy Nayal Mykaela Christyl Paunillan
Kezia Desiree Pestaño Faith Hope Samperoy
Case Problem
Overview
• Wally Wilson is a commercial artist who makes a good living by
doing freelance work
• Wally has been investing in the stock market for some time, buying
mostly high-quality growth stocks as a way to achieve long-term
growth and capital appreciation.
• He feels that with the limited time he has to devote to his security
holdings, high-quality issues are his best bet.
• He is disturbed that some of his growth stocks aren’t doing even as
well as many good-grade income shares. He therefore decides to
have a chat with his broker, Al Fried.
• Both Al and Wally are thinking along the same lines.
• Al points out that dividend yields on income shares are indeed
way up and that is because of the state of the economy, the
outlook for growth stocks is not particularly bright.
• He suggests that Wally seriously consider putting some of his
money into income shares to capture the high dividend yields that
are available.
• Al digs up some forecast information about Hydro-Electric (a high-
yield public utility stock) and presents it to Wally for his
consideration:
Year Expected EPS ($) Expected Dividend
Payout Ratio (%)
2016 $3.25 40%

2017 $3.40 40%

2018 $3.90 45%

2019 $4.40 45%

2020 $5.00 45%

• The stock currently trades at $60 per share.
• Al thinks that within five years it should be trading at $75 to $80 a
share.
• Wally realizes that to buy the Hydro-Electric stock, he will have to
sell his holdings of CapCo Industries—a highly regarded growth
stock that Wally is disenchanted with because of recent
substandard performance.
 ?
How would you describe
Wally’s present investment
program?

How do you think it fits him

and his investment objectives?
Answer
• Wally has been investing in the stock market for some time, buying
mostly high-quality growth stocks as a way to achieve long-term
growth and capital appreciation. High-quality growth stocks require
time and keen monitoring though. At present, Wally has limited time to
devote to his investment program aside from the fact that the state of
the economy is not good and the outlook for growth stocks is not
particularly bright.
• With dividend yields on income shares going up, putting some of
Wally’s money into income shares to capture the high dividend yields
that are available seems fit and right for him, considering his limited
time to monitor his investment and the economic condition.
 ?
Consider the hydro-electric
stock.
Determine the amount of annual
dividends Hydro-Electric can be
expected to pay over the years
2016 to 2020.
Answer
Year Expected EPS Payout Ratio Dividend

2016 $3.25 40% $1.30

2017 $3.40 40% $1.36

2018 $3.90 45% $1.76

2019 $4.40 45% $1.98

2020 $5.00 45% $2.25

 ?
Compute the total dollar
return that Wally will make
from hydro-electric if he
invests $6,000 in the stock and
all the dividend and price
expectations are realized.
Answer
Year Dividends/ Share Share Shares Value

2016 $1.30 100 $130.00

2017 $1.36 100 $136.00

2018 $1.76 100 $176.00

2019 $1.98 100 $198.00

2020 $2.25 100 $225.00

2020 END TOTAL     $865.00

Answer
• The stock currently trades at $60 per share, so with $6,000.00
investment, Wally will hold 100 shares ($6,000.00/$60.00) from
Hydro-Electric.
• Total dividends for 5 years is $ 865.00. If the stock is selling at
80.00 per share in 5 years then his 100 shares would be $ 8,000.00,
resulting in a capital gain of $ 2,000.00 ($8,000.00-$6,000.00=
$2,000.00).
• To sum up the dividends and capital gain, Wally’s total return would
be $2,865.00.
If Wally participates in the company’s dividend

?
reinvestment plan, how many shares of stock will he
have by the end of 2020? What will they be worth if
the stock trades at $80 on December 31, 2020?
Assume that the stock can be purchased through the
dividend reinvestment plan at a net price of $50 a
share in 2016, $55 in 2017, $60 in 2018, $65 in
2019, and $70 in 2020. Use fractional shares, to 2
decimals, in your computations. Also, assume that,
as in part b, wally starts with 100 shares of stock
and all dividend expectations are realized.
Answer
Additional
Beginning Dividends/
Year Dividend Value/ share Shares of
shares Share
Stock per Year

2016 100.00 $1.30 $130.00 $50.00 2.60

2017 102.60 $1.36 $139.54 $55.00 2.54
2018 105.14 $1.76 $185.04 $60.00 3.08
2019 108.22 $1.98 $214.28 $65.00 3.30
2020 111.52 $2.25 $250.91 $70.00 3.58
END 2020 115.10     $80.00  
TOTAL         15.10

 SHARE VALUE END 2020

# OF SHARES AT THE END OF 2020 115.10 $9,208.00
 Would Wally be going to a different

?
investment strategy if he decided to buy
shares in hydro-electric? If the switch is
made, how would you describe his new
investment program? What do you think
of this new approach? Is it likely to lead
to more trading on Wally’s behalf? If so,
can you reconcile that with the limited
amount of time he has to devote to his
portfolio?
Answer
• Based on the above computation of projected returns through
dividend reinvestment plan, Wally will not be going in a different
direction.
• Considering his limited time to monitor his investment portfolio,
this reinvestment plan is the right program for him since the
dividend he will earn from his initial investment will just accumulate
and carry over year after year.
End of slide…
Thank you so much
for listening ^_^