ASSET VALUATION:

You have accumulated savings of $1,050,000 and decided that you will invest in one of the following investment opportunities:

a. Nationalist Bank bonds with a par value of $1,000, an annual coupon interest rate of 9.75% per annum, paying semi-annually. The bonds are current being sold for $1,314 and mature in 12 years time.

b. UnderGrad Limited preferred stock paying a dividend of $3.50 and selling for $28.50.

c. Grace Limited common stock is selling for $39.75. The stock recently paid a $1.40 dividend and the firm's earnings per share has increased from $1.75 to $3.25 in the past five years.

The firm expects to grow at the same rate for the foreseeable future. Your required returns for these investments are 3% for the bond, 5% for the preferred stock, and 15% for the common stock.

Required: a) Calculate the cost* of each investment based on your respective required rates of returns.

b) Which investment would you select? Why?