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Question 2 (Equity Valuations) (50%) You have finally saved $10,000 and are ready to make your first investment. You have the following two alternatives for
Question 2 (Equity Valuations) (50%) You have finally saved $10,000 and are ready to make your first investment. You have the following two alternatives for investing that money: 1. Southwest Bancorp preferred stock paying a dividend of $2.63 and selling for $26.25. 2. Emerson Electric common stock selling for $52. The stock recently paid a $1.60 dividend and the firm's earnings per share has increased at the rate of 8.15% in the past 5 years. The firm expects to grow at the same rate for the foreseeable future. The required return for preferred stock is 8% and common stock is 12%. d) Calculate the value of preferred stock (10 points) and the common stock (10 points) using the corresponding required rate of return. e) Which investment would you select? Why? (10 points) f) Calculate the expected rate of return for investors in preferred stock (10 points) and in common stock. (10 points)
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