Person X is ready to make his first investment. For the purpose of that he saved $10,000 and he has three alternative investment opportunities. In the first alternative, the par value of the bond is $1000 ,4.2% of interest and sells for $1115 and matures in the 4 th year. The second alternative is company B’s stock paying a dividend of $2.63 and selling for $26.25. The third alternative is company E vending stock for $60 with a par value of $5 and dividend of 1.88. The company E expected to grow in the predictable future. To determine: The required rate of return would create person X indifferent to all three alternatives.

Question

Want to see the full answer?

Answer 1

Question

Chapter 8, Problem 4MC

Summary Introduction

Case Summary:

Person X is ready to make his first investment. For the purpose of that he saved $10,000 and he has three alternative investment opportunities. In the first alternative, the par value of the bond is $1000 ,4.2% of interest and sells for $1115 and matures in the 4^th year.

The second alternative is company B’s stock paying a dividend of $2.63 and selling for $26.25. The third alternative is company E vending stock for $60 with a par value of $5 and dividend of 1.88. The company E expected to grow in the predictable future.

To determine: The required rate of return would create person X indifferent to all three alternatives.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

No Excel. I need to see the work or I will not understand how the problem is solved. The Schnuz Corporation has a net income of $21 million and 5 million shares outstanding. Its common stock is currently selling for $49 per share. The company plans to sell common stock to set up a new cat food manufacturing plant with a net cost of $23,800,000. The plant will not produce a profit for one year, and then it is expected to earn a 14 percent return on the investment. Chlo Incorporated, an investment banking firm, plans to sell the issue to the public for $45 per share with a spread of 3.5 percent. a. How many shares of stock must be sold to net $23,800,000? (Note: No out-of-pocket costs should be considered in this problem.) b. What are the earnings per share and the price-earnings ratio before the issue (based on a stock price of $49)? What will be the price per share immediately after the sale of stock if the P/E stays constant? c. Compute the EPS and the price (if the P/E stays…

Trump Card Co. will issue stock at a retail (public) price of $32. The company will receive $29.20 per share. a. What is the spread on the issue in percentage terms? b. If the firm demands a new price only $2.20 below the public price suggested in part a, what will the spread be in percentage terms? c. To hold the spread down to 2.5 percent based on the public price in part a, what net amount should Trump Card Co. receive?

No excel. I need to see the work or I will not understand. Blue Jeans Incorporated needs to raise $ 4.5 million of funds on a 12-year issue. If it places the bonds privately, the interest rate will be 10 percent. Fifty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 9 percent, and the underwriting spread will be 1.5 percent. There will be $110,000 in out-of-pocket costs. The debt will be outstanding for the full 12-year period, at which time it will be repaid. For each plan, compare the net amount of funds initially available to the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 13 percent annually.