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# Analyze and select investment from CBS bond

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

? A CBS bond with a par value of \$1,000, an interest rate of 7.625, and a maturity of 10 years. The bond is selling for \$986

? Alabama Power Company preferred stock with a \$50 par value and a dividend of \$2.8125 per year. The stock is currently trading at \$39 per share.

? Emerson Electric common stock that is selling for \$80 with a par value of \$5. This stock recently paid \$2.10 dividend, and the firm's earnings per share have increased from \$2.40 to \$4.48 in the past 5 years. An equivalent amount of growth in the dividend is expected.

Your required rates of return for those investments are 6% for the bond, 7% for the preferred stock, and 15% for the common stock. Using this information, answer the following questions:

? Calculate the value of each investment based on your required rate of return.
? Which investment would you select? Why?
? Assume Emerson Electric's managers expect an earnings downturn and a resulting decrease in growth of 3%. How does this affect your answers to parts 1 and 2?
? What required rates of return would you indifferent to all three options?

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#### Solution Summary

The solution explains how to calculate the price and rates of return on given investment alternatives

\$2.19