You have savings and you have the following alternatives for investing your money: 1. Apple company bond with a par value of $1,000 that pays 4.0 percent coupon rate, the current price of the bond is $1,120 and the bond matures in 4 years. 2. Tesla preferred stock which pays a dividend of $2.6 and its current price is $32.8. 3. American Airlines common stock with a price of $70, the company recently paid a dividend of $2.1. In the last 10 years, the firm's earnings per share has increased from $1.6 to $4.1 and we assume that the same growth rate will continue in the future. Your required rates of return for these investments are 3 percent for the bond, 5 percent for the preferred stock, and 12 percent for the common stock. This implies that you will use those values as the discount rate for the respective asset. Based on this information, please answer the questions below. a. Find each investment's value (price) by using the related required rate of return. b. Among the three, which investment(s) will you choose? Why? c. Let's assume that the growth rate of American Airlines is expected to be 1.5% under its historical growth rate due to the economic downturn. Will this new information affect your answers to points a and b? How?
You have savings and you have the following alternatives for investing your money: 1. Apple company bond with a par value of $1,000 that pays 4.0 percent coupon rate, the current price of the bond is $1,120 and the bond matures in 4 years. 2. Tesla preferred stock which pays a dividend of $2.6 and its current price is $32.8. 3. American Airlines common stock with a price of $70, the company recently paid a dividend of $2.1. In the last 10 years, the firm's earnings per share has increased from $1.6 to $4.1 and we assume that the same growth rate will continue in the future. Your required rates of return for these investments are 3 percent for the bond, 5 percent for the preferred stock, and 12 percent for the common stock. This implies that you will use those values as the discount rate for the respective asset. Based on this information, please answer the questions below. a. Find each investment's value (price) by using the related required rate of return. b. Among the three, which investment(s) will you choose? Why? c. Let's assume that the growth rate of American Airlines is expected to be 1.5% under its historical growth rate due to the economic downturn. Will this new information affect your answers to points a and b? How?
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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Transcribed Image Text:You have savings and you have the following alternatives for investing your money:
1. Apple company bond with a par value of $1,000 that pays 4.0 percent coupon rate, the
current price of the bond is $1,120 and the bond matures in 4 years.
2.
Tesla preferred stock which pays a dividend of $2.6 and its current price is $32.8.
3. American Airlines common stock with a price of $70, the company recently paid a dividend of
$2.1. In the last 10 years, the firm's earnings per share has increased from $1.6 to $4.1 and
we assume that the same growth rate will continue in the future.
Your required rates of return for these investments are 3 percent for the bond, 5 percent for the preferred
stock, and 12 percent for the common stock. This implies that you will use those values as the discount
rate for the respective asset. Based on this information, please answer the questions below.
a. Find each investment's value (price) by using the related required rate of return.
b. Among the three, which investment(s) will you choose? Why?
c.
Let's assume that the growth rate of American Airlines is expected to be 1.5% under its
historical growth rate due to the economic downturn. Will this new information affect your
answers to points a and b? How?
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