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Part 1

You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money:

A Microsoft bond with a par value of

$1,000

that pays

8.75

percent on its par value in interest, sells for

$1,138.46,

and matures in

19

years.

Southwest Bancorp preferred stock paying a dividend of

$2.22

and selling for

$22.83.

Emerson Electric common stock selling for

$57.85,

with a par value of $5. The stock recently paid a

$1.21

dividend, and the firm's earnings per share has increased from

$2.35

to

$3.77

in the past 5 years. The firm expects to grow at the same rate for the foreseeable future.

Your required rates of return for these investments are

8.50

percent for the bond,

8.00

percent for the preferred stock, and

12.50

percent for the common stock. Using this information, answer the following questions.

a. Calculate the value of each investment based on your required rate of return.

b. Which investment would you select? Why?

c. Assume Emerson Electric's managers expect an earnings to grew at

1

percent above the historical growth rate. How does this affect your answers to parts a and b?

d. What required rates of return would make you indifferent to all three options?

Question content area bottom

Part 1

a. If your required rate of return on the bonds is

8.50%,

what is the value of Microsoft bond?

$enter your response here

(Round to the nearest cent.)

Part 2

If your required rate of return on the preferred stock is

8.00%,

what is the value of Southwest Bancorp preferred stock?

$enter your response here

(Round to the nearest cent.)

Part 3

Emerson Electric's earnings per share has increased from

$2.35

to

$3.77

in the past five years. What is the annual compounding growth rate?

enter your response here%

(Round to two decimal places.)

Part 4

If your required rate of return on the common stock is

12.50%,

what is the value of Emerson Electric common stock?

$enter your response here

(Round to the nearest cent.)

Part 5

b. Should you invest in the Microsoft bond?(Select from the drop-down menu.)

Yes, the expected value of the bond is greater than the market price.

Yes, the expected value of the bond is greater than the market price.

No, the expected value of the bond is less than the market price.

Part 6

Should you invest in the Southwest Bancorp preferred stock?(Select from the drop-down menu.)

No, the expected value of the preferred stock is less than the market price.

No, the expected value of the preferred stock is less than the market price.

Yes, the expected value of the preferred stock is greater than the market price.

Part 7

Should you invest in the Emerson Electric common stock?(Select from the drop-down menu.)

No, the expected value of the common stock is less than the market price.

Yes, the expected value of the common stock is greater than the market price.

No, the expected value of the common stock is less than the market price.

Part 8

c. Assume Emerson Electric's managers expect an earnings to grew at

1

percent above the historical growth rate. What is the value of Emerson Electric common stock?

$enter your response here

(Round to the nearest cent.)

Part 9

Should you invest in the Emerson Electric common stock?(Select from the drop-down menu.)

Yes, the expected value of the common stock is greater than the market price.

Yes, the expected value of the common stock is greater than the market price.

No, the expected value of the common stock is less than the market price.

Part 10

d. What required rate of return would make you indifferent to Microsoft bond?

enter your response here%

(Round to two decimal places.)

Part 11

What required rate of return would make you indifferent to Southwest Bancorp preferred stock?

enter your response here%

(Round to two decimal places.)

Part 12

What required rate of return would make you indifferent to Emerson Electric common stock?

enter your response here%

(Round to two decimal places.)