Reference no: EM133183796

Question - After graduating from Yorkville University with a BBA, you were able to find a well-paying job and now have saved $200,000 and now want to invest this money. You recall from your Introduction to Managerial Finance class that you could invest in either stocks or bonds. Just like Warren Buffet you believe in value investing, whereby you search out investments that are priced below fair value. You do some research and find two investments one is a bond the other is a stock. Using the tools you learned in your Managerial Finance class, which investment is currently mispriced and would provide a better return?

The first investment is a bond, which is currently selling at $1,052.50. This bond is issued by BCE which has a solid AA credit rating. The bond has a coupon yield of 10% paid semiannually, with a $1,000 face value. It has 12 years to maturity, with a yield of 9%.

The other investment is a stock, which is currently trading at $116.35 per share. This stock is also a solid Canadian company which pays an annual dividend of $8 per share. Analysts are expecting the dividend to grow at a 3% rate, and the market rate of return on similar types of stocks is 10%

Would your decision change if the bank of Canada would increase interest rates by 2% next month which would increase both the Yield on the bond and the market rate on the stock. If so, why?

If you plan to sell your stock and/or bond in 3 years would your decision change? How would taxes play a role in this decision?