Assignment
You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing the money:
A Microsoft bond with a par value of $1,000 that pays 4.2 percent on its par value in interest, sells for $1115 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 par value of $5. The stock recently paid $1.88 dividend, and the firm's earning per share has increased from $2.27 to $3.78 in the past 5 years. The firm expects to grow at the same rate for the foreseeable future.
1) Calculate the value of each investment based on your required rate of return
2) Which investment would you select? Why?
3) Assume Emerson Electric's manager's expect earnings to grow at 1 percent above the historical growth rate. How does this assumption affect your answers to part a) and b)?
4) What required rates of return would make you indifferent to all three options?