Problem:
You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money: 1. Capital Cities ABC, Inc. bonds with a par value of $1000, a coupon interest rate of 8.75 percent, are selling for $1,314, and mature in 12 years. 2. Southwest Bancorp preferred stock paying a dividend of $2.50 and selling for $25.50. 3. Emerson Electric common stock selling for $36.75. The stock recently paid a $1.32 dividend and the firm's earnings per share has increased from $1.49 to $3.06 in the past five years. The firm expects to grow at the same rate for the foreseeable future. Your required rates of return for these investments are 6 percent for the bond, 7 percent for the preferred stock, and 15 percent for the common stock.
Using this information, answer the following questions.
Question 1: Calculate the value of each investment based on your required rate of return.
Question 2: Which investment would you select? Why?
Question 3: Assume Emerson Electric's managers an earnings downturn and a resulting decrease in growth of 3 percent. How does this affect your answer to parts a and b?
Question 4: What are required rates of return would make you indifferent to all three options?
Note: Please show basic calculation