You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing the money: A Microsoft bond with a par value of $1,000 that pays 4.2 percent on its par value in interest, sells for $1,115, and matures in 4 years. Southwest Bancorp preferred stock paying a dividend of $2.63 and selling for $26.25. Emerson Electric common stock selling for $60, with a par value of $5. The stock recently paid a $1.88 dividend, and the firms earnings per share has increased from $2.27 to $3.78 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 3 percent for the bond, 5 percent for the preferred stock, and 12 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 Electrics managers expect earnings to grow at 1 percent above the historical growth rate. How does this assumption affect your answers to parts (a) and (b)? d. What required rates of return would make you indifferent to all three options?

High Tech was founded by Roger Mortimer last year. The company is developing a new technology that may enhance significantly the speed of the Internet. There has been a debate in the board of directors about the alternative sources to finance R&D investments ($5,000,000) and its impact on the market price of HighTech Inc. The CEO was reluctant to issue new shares and suggested the company issue long -term bonds instead . The company is expecting a supernormal growth rate while it exploits its technological and marketing lead. Dividends are expected to rise by 25 percent per year for the next 5 years. However, the growth rate will revert to only 5 percent per year indefinitely . The company has just paid dividends of $1.5 per share. The Treasury bill rate of interest is 5 percent and the risk premium has been 5 percent. HighTech Inc. is in a higher systematic risk class than the average market index and, therefore , has a beta of 1.2. The CFO of the company convinced the board of direc tors to fund the R&D investments and the company has recently issued 8 percent coupon bonds and preference shares both with par value $100. The coupon bonds mature in 5 years and the competitive market interest rate on similar bonds is 12 per cent However , the preference shares are expected to offer a fixed 8 percent preferred dividends . a. Calculate the intrinsic value of the ordinary and preference shares of High Tech Inc b. Calculate the market price of coupon bonds . c. Some board directors advocate the use of more debt because of its positive effect on managerial actions. Explain . d. Explain to the board of directors of HighTech that the price of their coupon bonds will necessarily respond to the interest rate fluctuations in the market