http://intrinsicvaluespm.yolasite.com/sp...
Basically you need to use the compound interest formula to determine the rate of growth in EPS from 1.49 to 3.06. Solve for the interest rate in the compound interest formula:
i = (FV/PV)^(1/n)-1
FV would be 3.06, PV is 1.49 and n = 5.
Just plug the EPS, Growth rate, and Discount rate (20%) into this equation here and you have the value of the stock:
http://intrinsicvaluespm.yolasite.com/
Of course the problem might want you to use the gordon growth model instead. The inputs would be the same, but the formula is different.
To pick between the bonds and the preferred stock you need to know what the returns are. All else equal, pick the one with the highest return. Although in the real world things are more complicated because bonds are usually lower risk. Sorry I can't be more helpful with that part of the problem.
Good luck
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Invest in XXXX company common stock selling for $36.75. The stock recently paid a $1.32
dividend and the firm’s earnings per share has increase from $1.49 to $3.06 in the past five years.
The firm expects to grow at the same rate for the foreseeable future.
Common stock rate of return is 20%.
Find the value of the common stock, but to do so we have to find the growth rate.
Need help with my homework!!
Additional question: Once I've gotten the values of other bonds and preferred stocks, how do I choose which one to invest in!
Bond value: 1230.56
Preffered Stock: 35.71
