Answer
The stock isn't a good investment.
The future value of the stock is 120, and the future value of the dividends is 16.23. The combined future value is 136.23.
The future value of 110 dollars in the bank account is 138.59, more than the future value of the stock.
Work Step by Step
start of year zero--purchase stock at 110
start of year one--nothing happens
start of year two (end of year one)--get dividend of 5
start of year three (end of year two)--get dividend of 5
start of year four (end of year three)--get dividend of 5 and sell stock at 120
We know the ending value of the stock--120 dollars. We need to determine the future value of the dividends.
$FV = 5*1.08^2 + 5*1.08 + 5$
$FV = 5*1.1664 + 5.40 + 5$
$FV = 5.83 + 10.40$
$FV = 16.23$
Stock + FV = total value
$120 + 16.23 = 136.23$
Future value of bank account
$110*1.08^3$
$110*1.259712$
$138.59$
