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, an interest rate of 4.2 percent on its par value in interest, sells for $1,115 , and matures in 4 years
⢠Southwest Bancorp preferred stock paying a dividend of $2.63 and selling for $26.25
⢠Emerson Electric common stock that is selling for $60 with a par value of $5.
The stock recently paid a $1.88 divided, and the firm's earnings per share has increased from $2.27 to $3.78 in the past 5 years
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. Calculate the value of each investment based on your required rate of return.
2. Which investment would you select? Why?
3. Assume Emerson Electric's managers expect earnings to grow at 1 percent above the historical growth rate. How does this assumption affect your answers to part a and b?
4. What required rates of return would make you indifferent to all three options?
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, an interest rate of 4.2 percent on its par value in interest, sells for $1,115 , and matures in 4 years
⢠Southwest Bancorp preferred stock paying a dividend of $2.63 and selling for $26.25
⢠Emerson Electric common stock that is selling for $60 with a par value of $5.
The stock recently paid a $1.88 divided, and the firm's earnings per share has increased from $2.27 to $3.78 in the past 5 years
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. Calculate the value of each investment based on your required rate of return.
2. Which investment would you select? Why?
3. Assume Emerson Electric's managers expect earnings to grow at 1 percent above the historical growth rate. How does this assumption affect your answers to part a and b?
4. What required rates of return would make you indifferent to all three options?
