CASE 4: You have finally saved $10,000 and are ready to make your first investment. You...
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CASE 4: You have finally saved $10,000 and are ready to make your first investment. You have the following three alternatives for invest- ing that money: Capital Cities ABC, Inc., bonds, which have a par value of $1,000 and a coupon interest rate of 8.75 percent, are selling for $1,314 and mature in 12 years. Southwest Bancorp preferred stock is paying a dividend of $2.50 and selling for $25.50. Emerson Electric common stock is selling for $36.75. The stock recently paid a $1.32 dividend, and the firm's earn- ings per share have 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. a. Calculate the value of each investment based on your re- quired rate of return. b. Which investment would you select? Why? c. Assume Emerson Electric's managers expect an earnings downturn and a resulting decrease in growth of 3 percent. How does this affect your answers to parts a and b? d. What required rates of return would make you indifferent to all three options? CASE 4: You have finally saved $10,000 and are ready to make your first investment. You have the following three alternatives for invest- ing that money: Capital Cities ABC, Inc., bonds, which have a par value of $1,000 and a coupon interest rate of 8.75 percent, are selling for $1,314 and mature in 12 years. Southwest Bancorp preferred stock is paying a dividend of $2.50 and selling for $25.50. Emerson Electric common stock is selling for $36.75. The stock recently paid a $1.32 dividend, and the firm's earn- ings per share have 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. a. Calculate the value of each investment based on your re- quired rate of return. b. Which investment would you select? Why? c. Assume Emerson Electric's managers expect an earnings downturn and a resulting decrease in growth of 3 percent. How does this affect your answers to parts a and b? d. What required rates of return would make you indifferent to all three options?
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