Question 1 Your uncle, 56, just retired after 31 years of teaching. He is a husband and father of two children who are still dependent.

Emerson Electric common stock selling for $36.75. The stock recently paid a $1.32 dividend and the firm’s earnings per share has 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% for the bond, 7% for the preferred stock and 20% for the common stock. Using this information, answer the following questions.

Calculate the value of each investment based on your required rate of return. [12 marks]Which investment would you select? Why? [6 marks]Assume Emerson Electric’s managers expect an earnings downturn and a resulting decrease in growth of 3%. How does this affect your answers to parts (a) and (b)? [10 marks]What required rates of return would make you indifferent to all three options? [12 marks]

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