Explore BrainMass

Explore BrainMass

    required rate of return

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    CBS bond with a par value of $1,000, an interest rate of 7.625 percent, 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 61 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 a $2.50 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 these investments are 6 percent for the bond, 7 percent for the preferred stock, and 15 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 Electrics managers expect an earnings downturn and a resulting decreases in growth of 3 percent. How does this affect your answers to parts 1 and 2?
    d. What required rates of return would make you indifferent to all three options?

    © BrainMass Inc. brainmass.com June 4, 2020, 12:30 am ad1c9bdddf
    https://brainmass.com/business/finance/required-rate-of-return-342531

    Solution Summary

    Calculate the value of each investment based on your required rate of return.

    $2.19

    ADVERTISEMENT