Which Investment Should We Make?

Pentron Data Corporation has a significant amount of excess cash on hand and has decided to make a long-term investment in either debt or equity securities. After a careful analysis, the investment committee has recommended to the company treasurer that Pentron purchase either one of the following two investments. The first investment involves purchasing sixty $1,000, 8% bonds issued by Andrea Company. The bonds mature in four years, pay interest semiannually, and are currently selling at 92. The second investment alternative involves purchasing 3,000 shares of Franklin Corporation common stock at $30 per share

(including brokerage fees). The investment committee believes that the Franklin stock will pay an annual dividend of $3.50 per share and is likely to be salable at the end of four years for $36 per share.

Discuss the following questions:

1. If Pentron wants to earn 12% per year, should it make either investment?

2. Which of the two investments would you advise the treasurer to invest in assuming the inherent risk is approximately equal? Your decision should be based on which investment provides the more attractive return, ignoring income tax effects.