You are considering three investments: Bond that is selling in the market at $1,200. The bond has a $1,000 par value, pays interest at 14 percent, and is scheduled to mature in 12 years. For bonds of this ris
You are considering three investments:
Bond that is selling in the market at $1,200. The bond has a $1,000 par
value, pays interest at 14 percent, and is scheduled to mature in 12 years.
For bonds of this risk class, you believe that a 12 percent
should be required.
dividend of $12. Your required rate of return for this stock is 14 percent.
Common stock ($35 par value) that recently apaid a $3 dividend. The firm’s
return on equity is 12.3%. The firm’s earning per share was $5.50 and it
paid $3.20 in dividends per share. The stock is selling for $25, and you think
a reasonable required rate of return for the stock is 20 percent.
Required:
a. Calculate the value of each security based on your required rate of
return.
b. Which investment(s) should you accept? Why?
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