QUESTION 4 As an assistant of financial officer, you have to evaluate the following three investment alternatives: Alternative 1: A bond that pays 10% coupon on its par value in interest and matures in 12 years. For bond of this class, you believe that a 12% rate of return should be required. The price of the bond is RM920. Alternative 2: A preferred stock that pay a dividend of RM6, your required rate of return for the stock is 14%. The preferred stock is selling at RM40. Alternative 3: A common stock that recently paid a RM5 dividend, the company’s return on equity is 16% and the company keeps only 50% of the profits for reinvestment. The reasonable required of return is 18%. The stock is selling at RM50 b. Calculate the value of the preferred stock c. Calculate the value of common stock d. From the above calculation, which investment should you accept? Why?
QUESTION 4 As an assistant of financial officer, you have to evaluate the following three investment alternatives: Alternative 1: A bond that pays 10% coupon on its par value in interest and matures in 12 years. For bond of this class, you believe that a 12% rate of return should be required. The price of the bond is RM920. Alternative 2: A preferred stock that pay a dividend of RM6, your required rate of return for the stock is 14%. The preferred stock is selling at RM40. Alternative 3: A common stock that recently paid a RM5 dividend, the company’s return on equity is 16% and the company keeps only 50% of the profits for reinvestment. The reasonable required of return is 18%. The stock is selling at RM50 b. Calculate the value of the preferred stock c. Calculate the value of common stock d. From the above calculation, which investment should you accept? Why?
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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QUESTION 4
As an assistant of financial officer, you have to evaluate the following three investment alternatives:
Alternative 1: A bond that pays 10% coupon on its par value in interest and matures in 12 years. For bond of this class, you believe that a 12% rate of return should be required. The price of the bond is RM920.
Alternative 2: A preferred stock that pay a dividend of RM6, your required rate of return for the stock is 14%. The preferred stock is selling at RM40.
Alternative 3: A common stock that recently paid a RM5 dividend, the company’s return on equity is 16% and the company keeps only 50% of the profits for reinvestment. The reasonable required of return is 18%. The stock is selling at RM50
b. Calculate the value of the preferred stock
c. Calculate the value of common stock
d. From the above calculation, which investment should you accept? Why?
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