CBG Corporation has $500,000 in a bank account paying 0.35% annual interest. As

Question

CBG Corporation has $500,000 in a bank account paying 0.35% annual interest. As an alternative to leaving the money in the account, the company is considering investing the entire amount for five years. F Investment A is fifty five-year discount government bonds which cost $10,000 each and will repay all interest and principal ($10,000) in a lump sum at maturity. The current market rate on similar bonds is 2.5%.Investment B is five hundred five-year corporate coupon bonds which cost $1,000 each and will pay annual interest with the par value ($1,000) repaid at maturity. The coupon interest rate on the bonds is 4% and the current market rate on bonds of a similar credit rating is 3.5%. Investment C is five thousand shares of preferred stock which costs $100 per share and pays a fixed annual dividend of $8.50 per share. The current market rate of return on similar preferred stock is 9% Investment D is ten thousand shares of common stock which costs $50 per share and recently paid an annual dividend of $4.25 per share. The company has been increasing earnings and dividends at an average annual rate of 4%. The current market rate of return on similar common stock is 12%.Investment E is a new machine tool center which would be used in an expanded assembly line in the company

Explanation / Answer

alternative 1 is investing in government bonds, it is carrying less risk but the return is too low i.e 2.5%

alternative 2 is investing in corporte bonds, and its return is 4%, little risk and less risk.

alternative 3 is investing in preferred stock with 8.5% return, is also carrying moderate risk. but the market return for the similar investments is 9%,

alternative 4 is investing in common stock, and its return is 11.76%, which is less by 0.24% than similar investments and this alternative carrying higher risk.

alternative 5 is purchasing a machine and its return is 473,875 at 10% discounting its NPV is -26,125 which is not acceptable.

If I am the invester i will chose invest in preferred stock with moderate risk.

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