Earnings downturn and resulting decrease in growth

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You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money: ~Capital Cities ABC, Inc bonds with a par values of $1,000, a coupon interest rate of 8.75%, are selling for $1,314 and mature in 12 years. ~Southwest Bancorp preferred stock paying a dividend of $2.50 and selling for $25.50. ! Emerson Electric Common Stock selling for $36.75. The stock recently paid a $1.32 dividend and the firm's earnings per share has increased from $1.49 to $3.06 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 6 % for the bond, 7% for the preferred stock, and 20% for the common stock. Using this information, answer the following questions: a. Calculate the value of each investment based on your required rate of return. b. Which investment would you select and why? c. Assume Emerson Electric's managers expect an earnings downturn and a resulting decrease in growth of 3%. Does this affect your answer to parts a and b? d. What required rates of return would make you indifferent to all three options?

Reference no: EM131050384

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