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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
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.
- Which investment would you select? Why?
- What required rates of return would make you indifferent to all three options?
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