You have accumulated savings of $50,000 and decided that you will invest in one of the following investment opportunities: A. JBC Bank bonds with a par value of $1,000, a semi-annual coupon interest rate of 9.75 percent per annum, are selling for $1,314 and mature in 12 years’ time. B. Sagimore Life Limited preferred stock paying a dividend of $3.50 and selling for $28.50. C. Lace Kennedy Limited common stock selling for $39.75. The stock recently paid a $1.40 dividend and the firm's earnings per share has increased from $1.75 to $3.25 in the past five years. The firm expects to grow at the same rate for the foreseeable future. Your required returns for these investments are 3% for the bond, 5% for the preferred stock, and 15% for the common stock. Required: a) Based on your respective required rates of returns, calculate the value of I. JBC Bank bonds ii. Sagimore Life Limited preferred stock iii. Lace Kennedy Limited common stock b) Which investment would you select? Why?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
You have accumulated savings of $50,000 and decided that you will invest in one of the following investment opportunities:
A. JBC Bank bonds with a par value of $1,000, a semi-annual coupon interest rate of 9.75 percent per annum, are selling for $1,314 and mature in 12 years’ time.
B. Sagimore Life Limited
C. Lace Kennedy Limited common stock selling for $39.75. The stock recently paid a $1.40 dividend and the firm's earnings per share has increased from $1.75 to $3.25 in the past five years. The firm expects to grow at the same rate for the foreseeable future.
Your required returns for these investments are 3% for the bond, 5% for the preferred stock, and 15% for the common stock.
Required:
a) Based on your respective required
I. JBC Bank bonds
ii. Sagimore Life Limited preferred stock
iii. Lace Kennedy Limited common stock
b) Which investment would you select? Why?
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