Mel Hanks has $20,000 to invest in either shares or debentures. The debentures that Mel is considering have a face value of $1000, an annual coupon rate of 12 percent and pay interest semi-annually. They are current selling for $1025 each. An interest payment has just been made and there are twelve years to maturity.

The shares Mel is considering have just paid a dividend of $1.50 a share, and are expected to grow at 10 percent for the next five years after which time they are expected to settle to a normal growth rate of 4 percent. The current market price of the shares is $25.50.

(a) If Mel determines the appropriate required rate of return for the shares to be 13 percent and the current market interest rate for the debentures to be 10 percent, determine the value of each investment.

(b) Advise Mel which securities, if any, he should invest in?