Reference no: EM132525382

1. You are considering three investments. The first is a bond that is selling in the market at $1 200. The bond has a $1 000 par value, pays interest at 8% and is scheduled to mature in 10 years. For bonds of this risk class you believe that a 9% rate of return should be required.

The second investment that you are analyzing is a preferred stock ($125 par value) that sells for $120 and pays an annual dividend of $18. Your required rate of return for this stock is 16%.

The last investment is a common stock that recently paid a $2 dividend. The firm expects to pay a dividend of $2.18 at year end and this growth in dividends per share is expected for the indefinite future. The stock is selling for $20 and you think a reasonable required rate of return for the stock is 20%.

Required:

a. Calculate for each security
i. Expected rate of return??????[14 marks]?
ii. The current value based on your required rate of return???

b. Which of the investment(s) should you accept? Why? ???

2. Xtra Ltd. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 12% during the next two years, at 10% in the third year, and at a constant rate of 4 % thereafter. ABC's last dividend was $2.50 and the required rate of return on the stock is 9%. Calculate the value of the stock ??? ???? ?

3. The ABC Ltd common stock currently sells for $34.00 but is expected to rise to $38.08 at the end of the year at which time it will pay a dividend of $3.23.

Determine the stock's

i. capital gain yield???????

ii. required rate of return??????

iii. dividend yield?