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Question - You have finally saved $15000 and are ready to make your first investment. You have the three following alternatives for investing that money: ? RBC Ltd bonds, with a face value of $800 and coupon interest rate of 7%, are selling for $1000 and mature in 8 years.
ANC preference shares are paying a dividend of $3.25 and selling $25.50.
CNE ordinary shares are selling for $25. The shares recently paid a $1.15 dividend and the firm's earning per share have increased from $1.50 to $3 in the past five years. The firm expects to grow at the same rate for the foreseeable future. Your required rates of return for these investments are 5% for the bond, 5.5% for the preference shares and 10% for the ordinary shares.
Required -
a) Calculate the value of each investment based on your required rate of return. Which investment would you select? Why.
b) Assume CNE's managers expect an earnings downturn and resulting decrease in growth of 3%. How does this affect your above answer?
c) What required rates of return would make you indifferent to all three options?
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