Reference no: EM132710258

You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money:

• ABC Inc., bonds with a par value of $1,000, a coupon interest rate of 8.75%, are selling for $1,314 and mature in 12 years
• Bancorp, preferred stock paying a dividend of $2.50 and selling for $25.50
• Traid Electric common stock selling for $36.76. The stock recently paid a $1.32 dividend and the firm earnings per share has increased from $1.49 to $3.06 in the past 5 years. The firm expects to grow at the same rate for the foreseeable future.

Your required rates of return for these investments are 6% for the bond, 7% for the preferred stocks and 15% for the common stocks. Using this formation answer the following questions:

Problem a. Calculate the value of each investment based on your required rate of return.

Problem b. Which investment would you select? Why?

Problem c. Assume Traid Electrics manager expect an earnings downturn and a resulting decrease in growth of 3%. How does this affect your answer to parts A and B?

Problem d. What required rates of return would make you indifferent to all three options?