You have finally saved $10,000 and are ready to make your firstinvestment. You have the three following alternatives for investingthat money:
-Capital Cities ABC, Inc. bonds with a par value of $1000, thatpays an 8.75 percent on its par value in interest, sells for$1,314, and matures in 12 years.
-Southwest Bancorp preferred stock paying a dividend of $2.50 andselling for $25.50.
-Emerson Electric common stock selling for $36.75, with a par valueof $5. The stock recently paid a $1.32 dividend and the firmâsearnings per share has increased from $1.49 to $3.06 in the pastfive years. The firm expects to grow at the same rate for theforeseeable future.
Your required rates of return for these investments are 6 percentfor the bond, 7 percent for the preferred stock, and 15 percent forthe common stock. Using this information, answer the followingquestions.
a. Calculate the value of each investment based on your requiredrate of return.
b. Which investment would you select? Why?
c. Assume Emerson Electricâs managers an earnings downturn and aresulting decrease in growth of 3 percent. How does this affectyour answer to parts a and b?
d. What are required rates of return would make you indifferent toall three options?
You have finally saved $10,000 and are ready to make your firstinvestment. You have the three following alternatives for investingthat money:
-Capital Cities ABC, Inc. bonds with a par value of $1000, thatpays an 8.75 percent on its par value in interest, sells for$1,314, and matures in 12 years.
-Southwest Bancorp preferred stock paying a dividend of $2.50 andselling for $25.50.
-Emerson Electric common stock selling for $36.75, with a par valueof $5. The stock recently paid a $1.32 dividend and the firmâsearnings per share has increased from $1.49 to $3.06 in the pastfive years. The firm expects to grow at the same rate for theforeseeable future.
Your required rates of return for these investments are 6 percentfor the bond, 7 percent for the preferred stock, and 15 percent forthe common stock. Using this information, answer the followingquestions.
a. Calculate the value of each investment based on your requiredrate of return.
b. Which investment would you select? Why?
c. Assume Emerson Electricâs managers an earnings downturn and aresulting decrease in growth of 3 percent. How does this affectyour answer to parts a and b?
d. What are required rates of return would make you indifferent toall three options?
