You have finally saved $10,000 and are ready to make your first ing that money:
ID: 2805588 • Letter: Y
Question
You have finally saved $10,000 and are ready to make your first ing that money: Capital Cities ABC, Inc., bonds, which have a par value of $1,000 and a coupon interest rate of 8.75 percent, are selling for $1,314 and mature in 12 years Southwest Bancorp preferred stock is paying a dividend of $2.50 and selling for $25.50. Emerson Electric common stock is selling for $36.75. The stock recently paid a $1.32 dividend, and the firm's earn ings per share have increased from $1.49 to $3.06 in the past five years. The firm expects to grow at the same rate for the foreseeable future. Your required rates of return for these investments are 6 percent for the bond, 7 percent for the preferred stock, and 15 percent for the common stock. Using this information, answer the following questions.Explanation / Answer
value of bond at 6%
Year
cash flow
present value of cash flow = cash flow /(1+r)^n r= 6%
1
87.5
82.54717
2
87.5
77.87469
3
87.5
73.46669
4
87.5
69.3082
5
87.5
65.38509
6
87.5
61.68405
7
87.5
58.1925
8
87.5
54.89858
9
87.5
51.79112
10
87.5
48.85954
11
87.5
46.09391
12
1087.5
540.4542
value of bond
sum of present value of cash flow
1230.556
value of preferred stock at 7%
present value of cash flow = cash flow /(1+r)^n r= 7%
Year
cash flow
present value of cash flow = cash flow /(1+r)^n r= 7%
1
2.5
2.336449
1
25.5
23.83178
value of preferred stock
sum of present value of cash flow
26.16822
value of common stock at 15%
Growth rate =(fv/pv)^1/n
(3.06/1.49)^(1/5)
0.1548
15.48%
Year
expected dividend
0
1.32
1
1.32*1.1548
1.524336
1.32551
2
1.32*1.1548^2
1.760303
1.331042
3
1.32*1.1548^3
2.032798
1.336598
4
1.32*1.1548^4
2.347475
1.342177
5
1.32*1.1548^5
2.710864
1.347779
present value of dividend
6.683105
current market price
36.75
present value of common stock
43.4331
value of bond at 6%
Year
cash flow
present value of cash flow = cash flow /(1+r)^n r= 6%
1
87.5
82.54717
2
87.5
77.87469
3
87.5
73.46669
4
87.5
69.3082
5
87.5
65.38509
6
87.5
61.68405
7
87.5
58.1925
8
87.5
54.89858
9
87.5
51.79112
10
87.5
48.85954
11
87.5
46.09391
12
1087.5
540.4542
value of bond
sum of present value of cash flow
1230.556
value of preferred stock at 7%
present value of cash flow = cash flow /(1+r)^n r= 7%
Year
cash flow
present value of cash flow = cash flow /(1+r)^n r= 7%
1
2.5
2.336449
1
25.5
23.83178
value of preferred stock
sum of present value of cash flow
26.16822
value of common stock at 15%
Growth rate =(fv/pv)^1/n
(3.06/1.49)^(1/5)
0.1548
15.48%
Year
expected dividend
0
1.32
1
1.32*1.1548
1.524336
1.32551
2
1.32*1.1548^2
1.760303
1.331042
3
1.32*1.1548^3
2.032798
1.336598
4
1.32*1.1548^4
2.347475
1.342177
5
1.32*1.1548^5
2.710864
1.347779
present value of dividend
6.683105
current market price
36.75
present value of common stock
43.4331
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