your aunt has told you that she has $10,000 and wants to make an investment. However, she does not know which security to purchase. You have decided to give her three alternatives: corporate bond, preferred stock and common stock:

• Corporate Bond of Trusted Bank (par value $1000, interest payments 6.35%, maturity 5 years, market price $1020, required rate of return 5%);
• Preferred Stock of Best Equipment, Inc. (dividend $2.63, market price $26.25, required rate of return 8%);
• Common Stock of Great Resorts, Inc. (par value $5, the most recent dividend $1.60, EPS (earnings per share) grew from $2.23 to $3.30 in past 5 years (growth 8.15%), market price $52, required rate of return 12%).

You have also explained your aunt that required rate of return is strictly linked to the risk of each security.

Question . Answer the following questions: (13 marks)

1. Calculate the value of each security. (3 marks)
2. Which investment should your aunt select? Why? (2 marks)
3. Assume that earnings of Great Resorts, Inc. would grow at 1 percent above the historical growth rate. How does this affect your answers to parts (a) and (b)? (2 marks)
4. What required rates of return would make your aunt indifferent to all three options? (6 marks)