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 recommends that Pentron purchase either one of the following two investments. The first investment involves purchasing sixty $1,000, 8% bonds issued by Andrea Company. The bonds mature in four 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 salable at the end of four years for $36 per share.
Discuss the following questions:
1. If Pentron wants to earn 12% 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.
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... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... 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...
Step by Step Answer:
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain