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 comma 000 that pays 10.00 percent on its par value in​ interest, sells for ​$1,112.43​, and matures in 18 years. bullet Southwest Bancorp preferred stock paying a dividend of ​$2.84 and selling for ​$20.57. bullet Emerson Electric common stock selling for ​$62.47​, with a par value of​ $5. The stock recently paid a ​$1.51 ​dividend, and the​ firm's earnings per share has increased from ​$2.23 to ​$3.74 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 9.00 percent for the​ bond, 13.50 percent for the preferred​ stock, and 13.50 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