A grandparent recently passed away and left a small inheritance for you and each of your family members. You receive a lump sum of $10,000 from the inheritance. Knowing the importance investing, you realize there are three alternatives in which you could invest your money.
Use your new skills to perform an analysis for Options 1, 2, and 3 below. Calculate the value for each option and show your work.
After your calculations, select one of the options to invest and explain your rationale in a detailed answer.
Option 1
An investment bond, which matures in 4 years, has a par value of $1000, pays 4.2% coupon, and currently sells for $1,115.
Use 3% as your required rate of return.
Option 2
A preferred stock, which pays a dividend of $2.63 per share, and has a share price of $26.25.
Use a 5% required rate of return.
Option 3
Common stock currently priced at $60, and paying $1.88 dividend.
Earnings per share have grown from $2.27 to $3.78 in the past 5 years, and is expected to grow at this identical rate for the near future.
Use 12% as your required rate of return.