Question

You have finally saved​ $10,000 and are ready to make your first investment. You have the three following alternatives for investing that​ money:

•A Microsoft bond with a par value of ​$1,000 that pays 8.75 percent on its par value in​ interest, sells for ​$1,251.99​,

and matures in 17 years.

•Southwest Bancorp preferred stock paying a dividend of ​$3.36 and selling for ​$24.49.

•Emerson Electric common stock selling for $56.48​, with a par value of​ $5. The stock recently paid a ​$1.78 ​dividend, and the​ firm's earnings per share has increased from $2.33 to ​$3.86 in the past 5 years. The firm expects to grow at the same rate for the foreseeable future.

Your required rates of return for these investments are 5.50 percent for the​ bond, 12.50 percent for the preferred​ stock, and 14.50 percent for the common stock. Using this​ information, answer the following questions.

a. Calculate the value of each investment based on your required rate of return.

b. Which investment would you​ select? Why?

c. Assume Emerson​ Electric's managers expect an earnings to grew at 3 percent above the historical growth rate. How does this affect your answers to parts ​(a​) and ​(b​)?

d. What required rates of return would make you indifferent to all three​ options?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE