Assignment

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

• A Microsoft bond with a par value of $1,000 that pays 4.2 percent on its par value in interest, sells for $1115 and matures in 4 years
• Southwest Bancorp preferred stock paying a dividend of $2.63 and selling for $26.25
• Emerson Electric common stock selling for $60, with par value of $5. The stock recently paid $1.88 dividend, and the firm’s earning per share has increased from $2.27 to $3.78 in the past 5 years. The firm expects to grow at the same rate for the foreseeable future.
• 1)Calculate the value of each investment based on your required rate of return
• 2)Which investment would you select? Why?
• 3)Assume Emerson Electric's manager's expect earnings to grow at 1 percent above the historical growth rate. How does this assumption affect your answers to part a) and b)?
• 4) What required rates of return would make you indifferent to all three options?