You have finally saved 10,000 and are ready to make first investment. You have the three following alternative for investing money: A Microsoft bond with a par value of $1,000 that pays 4.2 percent on its par vlaue in interest, sells for $1,115, and matures in 4 years. Southwest Bancorp preferred stock paying a dividend of 2.63 and selling for $26.25. Emerson Electric common stock selling for $60, with a par value of $5. The stock recently paid a $1.88 dividend, and the firm's earnings per share has increased from $2.27 to $3.78 in the past 5 years. The firm expets to grow at the same rate for the foreseeable future . Youre required rates of return for these investments are 3 percent for the bond, 5 percent for the preferred stock, and 12 percent for the common stock. Using this information, answer the following questions.
a. Calculate the value of each investment bsed in your required rate of return.
b. Which investment would you select ? Why?
c. Assume Emerson Electric's managment expect earning to grow at 1 percent above the historical growth rate. How does this assumption affect your answers to part (a) and (b)?
d. What required rates of return would you make you indifferent to all three options?