Investment decisions greatly depend upon valuation of investment options available in a stock market. Along with other market related factors, a rational investor relies on intrinsic value that truly depicts the value of a security based on its fundamentals factors. The intrinsic value allows investors to take investment decision by identifying over-valued and under-valued securities. Considering the significance of intrinsic value, you are required to select the best option from the three available securities, keeping all other things constant.

Security 1: A bond issued forever with face value of Rs. 1,000 paying an annual coupon of 12%. The bond is currently selling at Rs. 980, whereas, the required rate of return for such securities is 15%.

Security 2: The preferred stock paying an annual dividend of 10% per share with a face value of Rs. 80 per share. The shares are currently selling at Rs. 75 per share, whereas, the required rate of return for such securities is 15%.

Security 3: Common stock having face value of Rs. 100 per share. The company has paid Rs. 10 per share dividend last year and the annual growth rate of dividend is 5%. The shares are currently selling at Rs. 80 per share, whereas, the required rate of return for such securities is 15%.

Required:

Calculate intrinsic value of each above mentioned security to identify whether the security is undervalued or overvalued (Formula and working is mandatory) Based on intrinsic value, select one of the securities and justify your selection with proper reasoning.