#1- You are planning to buy 100 shares preferred stock, either Stock A or Stock B. Stock A pays an annual dividend of $4.50 and has a market price of $35. Stock B pays an annual dividend of $4.25 and has a market price of $36. If your required rate of return is 12%, which stock should you buy? HINT: Calculate the appropriate metric and decide.

#2- You intend to buy Marigo common stock at $100 per share, hold it for one year, and sell it after receiving a cash dividend of $6. How much will the stock price have to appreciate for you to achieve a required rate of return of 11%?

#3- You are considering three investments.

• The first is a bond selling for $1,100: it has $1,000 par value, coupon rate of 13%, and 15-year maturity. For bonds in this risk class, it should offer 14% yield to maturity (rate of return).
• The second is a preferred stock with $100 par value selling for $90 per share, with a $13 annual cash dividend you require a 15% rate of return on this preferred stock.
• The third is a common stock with $25 par value that pays a cash dividend of $2; earnings per share for the company increased from $3 to $6 over 10 years, and the growth in dividends will be the same as the growth in earnings per share. The market price of the stock is $20 per share, and you think a reasonable rate of return on it is 20%.

(You are NOT expected to do Excel calculations on this assignment. Therefore, the Excel results are shown below. Explain the inputs, output, and the interpretation of the output.)

The panel of Excel data is displayed on the next two pages for reference; use the Stock Questions Support Template.xlsx that shows the formulas in the cells, answer these questions:

1. Explain how the value of each security is calculated, based on the stated required rate of return.
2. Which investment would you make? Explain.
3. If your required rate of return changed to 12% for the bond, 14% for the preferred stock, and 18% for the common stock, how would your answers to parts a and b change? HINT: Use Stock Questions Support Sheet (Excel) to do the calculations explain whether or not the changes in required rates of return change your investment decision.

A)
Bond:
bond=		1,000.00
i=		13%
n=		15.00
required rate=		14%
Value=		938.58
Preferred Stock:
par=		100.00
selling price=		90.00
dividend=		13.00
required rate=		15%
Value=		86.67
Common Stock:
par=		25.00
dividend=		2.00
EPS growth=		7%
selling price=		20.00
required rate=		20%
Value=		16.46
B)
C)
1)
Bond:
bond=		1,000.00
i=		13%
n=		15.00
required rate=		12%
Value=		1,068.11
Preferred Stock:
par=		100.00
dividend=		13.00
required rate=		14%
Value=		92.86
Common Stock:
dividend=		2.00
EPS growth=		7%
selling price=		20.00
required rate=		18%
Value=		19.45
2)
Common Stock:
dividend=		2.00
EPS growth=		12%
selling price=		20.00
required rate=		0.20
Value=		28.00

#4- Which is better, a $40 stock or a $4 stock? Explain very briefly.

#5- Show the equation/formula you would use to calculate the average annual rate of return on a stock you bought on January 27, 2002 for $100 and sold on January 27, 2012 for $150? Assume that dividend payout was zero.

#6- Construct a table to succinctly compare and contrast the building blocks of stock and bond valuation.