What should be the price of the preferred stock

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Reference no: EM13129099

1. A firm is considering two mutually exclusive investments, each with an initial outlay of $100,000 and an expected life of 3 years. Assume that the firm has a cost of capital of 10 percent for each project. The two investments are of equal risk and have the following cash flows:

Investment A Investment B
Cash Flow Cash Flow
Year 0 -$100,000 -$100,000
Year 1 $40,000 $55,000
Year 2 $50,000 $55,000
Year 3 $110,000 $55,000

Calculate the payback period and the net present value for each investment. Show your calculations.
Based on the NPV and payback period calculations, which investment should the firm choose? Why?

2. What is the basic relationship between interest rates and bond prices, and why does this relationship exist?

3. Why is preferred stock considered to be a hybrid security? Explain.

4. An investor expects the value of a $1,000 investment to double within 8 years. What is the expected annual rate of growth in the investment?

5. A firm has a total debt of $600,000 and equity of $400,000. What is the debt/net worth ratio and the debt-to-total assets ratio for the firm? Show your calculations.

6.A bond has a principal amount of $1,000, an annual interest payment of $100, and a maturity of 10 years. What is the bond's value of price, if comparable debt yields 12 percent?

7. A firm has preferred stock outstanding that has a $40 annual dividend, a $1,000 par value, and no maturity. If comparable yields are 9 percent, what should be the price of the preferred stock?

Reference no: EM13129099

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