you have finally saved $10,000 and are ready to make your first investment. You have the...

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Finance

you have finally saved $10,000 and are ready to make your firstinvestment. You have the three following alternatives for investingthat money: Captial cities ABC, Inc. bonds with a par value of$1,000, that pays and 8.75 percent on its par value in interest,sells for $1,314, and marures in 12 years. southwest bancorppreferred stock paying a dividend f $2.50 and selling 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 firm'searnings per share has increased from $1.49 to $3.06 in the pastfive years. the firm expects to grow at the same rate fr theforeseeable future. your required rates of return for theseinvestments are 6 percent for the bond, 7 percent for the preferredstock, and 15 percent for the common stock. using this information,answer the following questions. a.) calculate the value of eachinvestment based on your required rate of return.. b.) whichinvestment would you select? why? c.) assume emerson Electric'smanagers exect an earnings downturn and a resulting decrease ingrowth of 3 percent. how does this affect your answers to part aand be? d.) what required rates of return would make youindifferent to all options?

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3.7 Ratings (608 Votes)

a Bond price at required 6 return Coupon payment 875par value 8751000 875 FV 1000 PMT 875 N 12 Rate 6 solve for PV PV 123056 Preferred stock at required 7 return Price Dividendrequired return 2507 3571 Common stock at See Answer

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Transcribed Image Text

you have finally saved $10,000 and are ready to make your firstinvestment. You have the three following alternatives for investingthat money: Captial cities ABC, Inc. bonds with a par value of$1,000, that pays and 8.75 percent on its par value in interest,sells for $1,314, and marures in 12 years. southwest bancorppreferred stock paying a dividend f $2.50 and selling 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 firm'searnings per share has increased from $1.49 to $3.06 in the pastfive years. the firm expects to grow at the same rate fr theforeseeable future. your required rates of return for theseinvestments are 6 percent for the bond, 7 percent for the preferredstock, and 15 percent for the common stock. using this information,answer the following questions. a.) calculate the value of eachinvestment based on your required rate of return.. b.) whichinvestment would you select? why? c.) assume emerson Electric'smanagers exect an earnings downturn and a resulting decrease ingrowth of 3 percent. how does this affect your answers to part aand be? d.) what required rates of return would make youindifferent to all options?