This Mini Case is available in MyFinanceLab. You have finally saved $10,000 and are ready to make

Question:

This Mini Case is available in MyFinanceLab. 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 firm's 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 Electric's 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?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...