Question
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
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 $1,275.25, and matures in 9 years. Southwest Bancorp preferred stock paying a dividend of $3.44 and selling for $24.11. Emerson Electric common stock selling for $62.87, with a par value of $5. The stock recently paid a $1.21 dividend, and the firm's earnings per share has increased from 2.31 to 3.77 in the past 5 yrs. The firm expects to grow at the same rate for the foreseeable future. Your required rates of return for these investments are 5.50 % for the bond, 12.50 % for the preferred stock, and 13% for the common stock. Using this info, 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 Electrics managers expect an earnings to grew at 3% above the historical growth rate. How does this affect your answers to parts a and b?
D. What required rate of return would make you indifferent to all 3 options?
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