Sarah Bain is a 33-year-old entrepreneur who is interested in saving on the Stock Exchange. She is risk-adverse in nature and has come to you an investment manager to gain advice. She wants to purchase a vacation home in the next 10 years. She also sourced the following information about the two top performing companies of the stock exchange: La Playa Resort International: The resort issues bonds, with a face value of $8 000, that has a coupon rate of 8% that is paid annually. The bond matures in 10 years. They issued common stock that paid dividends of $1.80. The required return on the common stock is 6%. The dividend is expected to grow at an annual rate of 5% for the next three years followed by a constant annual growth rate of 4% in year 4. The resort also issues preferred stock which pays a dividend of $4.50 per share at the end of each year. The current price of the stock is $72. Mc Motors Incorporated The resort issues bonds, with a face value of $10 000, that has a coupon rate of 14% that is paid semi-annually. The bond matures in 10 years. They issued preferred stocks that sells for $20 per share. The company just paid dividends of $1.82. The company expects a constant growth rate of 10% per year. Financial Management IPAGE 2 OF 2 They also issue common stocks that paid $5.66 in dividends last year. The expected growth rate is 6% for the foreseeable future. The required rate of return is 10%. Instruction:

You are required to do up a report for Ms. Bain.

A. The report should explain:

1. What a stock exchange is and the advantages and disadvantages of saving on it? (11 marks)

2. The two broad types of markets that exist in the financial arena and which would best suit Ms. Bain based on her investment goal and risk tolerance. (8 marks)

3. The difference between stocks and bonds (highlighting the pros and cons of investing in either based on Ms. Bain’s future goal).