You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing the money: A Microsoft bond with a par value of $1,000 that pays 4.2...

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




  1. A Microsoft bond with a par value of $1,000 that pays 4.2 percent on its par value in interest, sells for $1,115, and matures in 4 years.

  2. Southwest Bancorp preferred stock paying a dividend of $2.63 and selling for $26.25.

  3. Emerson Electric common stock selling for $60, with a par value of $5. The stock recently paid a $1.88 dividend, and the firm’s earnings per share has increased from $2.27 to $3.78 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 3 percent for the bond, 5 percent for the preferred stock, and 12 percent for the common stock. Using this information, answer the following questions.




  1. Which investment would you select? Why?

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






PLZ2 Cite 2 Reference
Course Materials: Keown, A.J., Martin, J.D., Petty, J.W., & Scott, D.F. (2020). Foundations of finance (10th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. ISBN: 0132339226






Answered Same DayFeb 01, 2022

Answer To: You have finally saved $10,000 and are ready to make your first investment. You have the three...

Ayushi answered on Feb 02 2022
119 Votes
Answers
Contents
A. Selection of investment:    3
B. Indifference Rates:    4
References:    5
Value of
the bond:
Par value, P = 1000
Coupon Rate = 4.2
Hence coupon amount, C = 1000*4.2% = 42
Assume annual payments of coupon
Time of maturity, N = 4 years
Required rate of return, R = 3%
Value of the bond = PV of all future coupon payments + PV of par value at maturity
Value of bond = $1,044.61
Value of the preferred stock:
Dividend, Dp= 2.63
Required rate of return, Kp = 5%
Value of preferred stock to you = Dp/Kp = 52.6
Value of common stock:
Last dividend, D0 = 1.88
Growth rate, g = CAGR between 3.78 and 2.27 over 5 years = (3.78 / 2.27) (1/5) – 1 = 10.74%
Required rate of return, ke = 12%
Value of...
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