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A. Calculate the value of each investment based on your required rate of return. B. Which investment would you select? Why? C. Assume EE s managers expect an earnings downturn and a resulting decrease in growth of 3 percent. How does this affect your answers to parts A and B? D.

A. Calculate the value of each investment based on your required rate of return. B. Which investment would you select? Why? C. Assume EE s managers expect an earnings downturn and a resulting decrease in growth of 3 percent. How does this affect your answers to parts A and B? D.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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You have finally saved ₹10,000 and are ready to make your first investment. You have the following three alternatives for investing that money: • ABC bonds, have 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. • SB Ltd preferred stock is paying a dividend of ₹2.50 and selling for ₹25.50. • EE’s common stock is selling for ₹36.75. The stock recently paid a ₹1.32 dividend, and the firm s earnings per share have 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 15 percent for the common stock. Using this information, answer the following questions. Page 7 of 9 A. Calculate the value of each investment based on your required rate of return. B. Which investment would you select? Why? C. Assume EE s managers expect an earnings downturn and a resulting decrease in growth of 3 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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