Pentron Data Corporation has a significant amount of excess cash on hand and has decided to make
Question:
Pentron Data Corporation has a significant amount of excess cash on hand and has decided to make a long-term investment in either debt or equity securities. After a careful analysis, the investment committee has recommended either one of the following two investments to the company treasurer. The first investment involves purchasing sixty $\$ 1,000,8$ percent bonds issued by the Andrea Company. The bonds mature in 4 years, pay interest semiannually, and are currently selling at 92 . The second investment alternative involves purchasing 3,000 shares of Franklin Corporation common stock at $\$ 30$ per share (including brokerage fees). The investment committee believes that the Franklin stock will pay an annual dividend of $\$ 3.50$ per share and is likely to be saleable at the end of four years for $\$ 36$ per share.
Discuss the following questions:
1. If Pentron wants to earn 12 percent per year, should it make either investment?
2. Which of the two investments would you advise the treasurer to invest in assuming the inherent risk is approximately equal? Your decision should be based on which investment provides the more attractive return, ignoring income tax effects.
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