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Assume Emerson Electric’s managers expect an earnings downturn and a resulting decrease in growth of 1 percent. How does this affect your answers to parts a and b? What required rates of return would make you indifferent to all three options?

01 / 10 / 2021 Assignment

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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 value of $1,000 and a coupon interest rate of
8.75 percent, are selling for $1,314 and mature in 12 years.

• Southwest
Bancorp preferred stock is paying a dividend of $2.50 and selling for $25.50.

• Emerson
Electric common stock is selling for $30.75. 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 percent for the bond, 7
percent for the preferred stock, and 20 percent 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? Why?

c.
Assume Emerson
Electric’s managers expect an earnings downturn and a resulting decrease in
growth of 1 percent. How does this affect your answers to parts a and b?

d. What
required rates of return would make you indifferent to all three options?



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