Your assistant provided you with his analysis of “Bond” vs “Share” investment and concluded that “Share” is a better investment because of its higher future value over the same 18-month period.

However, you recall faintly one Bob Chow said always compare alternatives on a present value basis. To resolve this conundrum you ask your assistant (an “A” student in KPU Acct 3380) to write a report on the bond-vs-share issue. In particulars, you have to:

1. Calculate the present value of cash flow of Bond and Share respectively, and
2. Explain why present value comparison might result in a different /or the same conclusion?

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As the table below indicates, MCC should consider making the share investment because this will allow MCC to have more money after eighteen months. However, since shares tend to be risky and the estimated future share price is not guaranteed, the bond investment likely makes more sense, especially as the future value amounts are not that different to justify the extra risk of owning the shares. However, if interest rates rise, the value of the bond may also decline. Bonds are not a risk free investment either. [Assuming investment risk of Bond and Share is the same (i.e., they have the same discount rate of 12%), evaluate which investment is better from cashflow alone] Solution [by your assistant] - "Share" is a better investment Bond Investment Share Investment Future Future Value Value Factor @ Factor @ 12%/2 Future Quarterly 12% /4 =6% Value Periods $39,326.00 37,100.00 35,000.00 500,000.00 $611,426.00 Semi- annual Periods 1 23 Principal Future value Semi- annual Bond Interest 7% $35,000.00 35,000.00 35,000.00 500,000.00 1.1236 1.0600 1.0000 1.0000 Quarterly Dividend $12,500.00 12,500.00 3 12,500.00 4 12,500.00 5 12,500.00 6 12,500.00 531,250.00 1 2 3% 1.1593 1.1255 1.0927 1.0609 1.0300 1.0000 1.0000 Future Value $14,491.25 14,068.75 13,658.75 13,261.25 12,875.00 12,500.00 531,250.00 $612,105.00 As the table below indicates, MCC should consider making the share investment because this will allow MCC to have more money after eighteen months. However, since shares tend to be risky and the estimated future share price is not guaranteed, the bond investment likely makes more sense, especially as the future value amounts are not that different to justify the extra risk of owning the shares. However, if interest rates rise, the value of the bond may also decline. Bonds are not a risk free investment either. [Assuming investment risk of Bond and Share is the same (i.e., they have the same discount rate of 12%), evaluate which investment is better from cashflow alone] Solution [by your assistant] - "Share" is a better investment Bond Investment Share Investment Future Future Value Value Factor @ Factor @ 12%/2 Future Quarterly 12% /4 =6% Value Periods $39,326.00 37,100.00 35,000.00 500,000.00 $611,426.00 Semi- annual Periods 1 23 Principal Future value Semi- annual Bond Interest 7% $35,000.00 35,000.00 35,000.00 500,000.00 1.1236 1.0600 1.0000 1.0000 Quarterly Dividend $12,500.00 12,500.00 3 12,500.00 4 12,500.00 5 12,500.00 6 12,500.00 531,250.00 1 2 3% 1.1593 1.1255 1.0927 1.0609 1.0300 1.0000 1.0000 Future Value $14,491.25 14,068.75 13,658.75 13,261.25 12,875.00 12,500.00 531,250.00 $612,105.00

Answer rating: 100% (QA)

Answer Here the period of investment is 15 years The same can be understand from the fact that there are 2 semi annual periods in a year and in case o... View the full answer