Evaluating Alternative Investments
Ellen Hays received a windfall from one of her investments. She would like to invest $100,000 of the money in Linwood Inc., which is offering common stock, preferred stock, and bonds on the open market. The common stock has paid $8 per share in dividends for the past three years, and the company expects to be able to perform as well in the current year. The current market price of the common stock is $100 per share. The preferred stock has an 8% dividend rate, cumulative and nonparticipating. The bonds are selling at par with an 8% stated rate.
1. What are the advantages and disadvantages of each type of investment?
2. Recommend one type of investment over the others to Ellen and justify your reason.