ini-Case inally saved $10,000 and are ready to make your first Your required rat

Question

ini-Case inally saved $10,000 and are ready to make your first Your required rates of retum for these investments are oe have u have the three following alternatives for invest- sment. g that money 6 percent for the bond, 7 percent for the preferred stock, and 15 percent for the common stock. Using this information, an- $1314 and mature in 12 years. Southwest Bancorp preferred stock is paying a dividend of $250 and selling for $25.50. Cipital Cities ABC, Inc. bonds with a par value of $1,000 swer the following questions. and a coupon interest rate of 8.75 percent, are selling for a. Calculate the value of each investment based on your re quired rate of return. b. Which investment would you select? Why? Emerson Electric common stock is selling for $36.75. The downturn and a resulting decrease in growth of 3 percent. c. Assume Emerson Electric's managers expect an earnings sock recently paid a $1.32 dividend and the firm's earnings How does this affect your answers to parts a and b? What required rates of return would make you indifferent to per share has increased from $1.49 to $3.06 in the past five ears. The fi m expects to grow at the same rate for the d. foresecable future. all three options?

Explanation / Answer

Part - A

Value of Each Investment

Bond

Value of bond = 1386.68

Preference Stock

Value of Prefernce Stock = preference dividend / Rate of Return

= 2.5/0.07

=35.72

Equity Stock

Dividend Payout Ratio = 1.32//1.49

=88.60%

Dividend = 3.06*88.60%

=2.71

Value of Equity = 2.71/0.15

=18.07

PART - B

SELECTED THE INVESTMENT

Prefered Stock is seleted the because highest Return

Bond = 386(1386-1000)/1000

=38.6%

Prefered Stock = 10.21(35.71-25.5)/25.5*100

=40% (Highest Return)

PART - C

Answer will be the same ,growth rate decrease 3%(again Share value decreases).

PART - D

RATE OF RETURN

Bond = interest + RV -NP/N

--------------------------

RV+NP/2

=87.50+1314-1000/12

----------------------------

1314+ 1000/2

=9.82%

Prefered Stock = preferred Stock dividend /Market price of Stock

=2.50/25..50

=9.80%

Equity Stock = D1/PO

=2.71/36.75

=7.37%

Particulars years Cashflow Pvf @ 6% DCF Interest 1-12 87.50 8.3838 733.58 Maturity 12 1314 0.4970 653.1 Total 1386.68

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