Common Stockholder

I have finally saved $10,000 and ready to make my very first investment. But I only have three alternatives for investing my money. My 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.

Capital Cities ABC

Capital Cities ABC, Inc. bonds with a par value of $1,000, that pays an 8.75 percent on its par value in interest, sells for $1,314, and matures in 12 years. Rate of return is 6%.

Preferred stock:

Expected return = dividends/stock price = $1,314/$1,000= 0.7610 or 0.07%

Common stock;

Expected return = dividends in year 1/stock price + growth rate

= $1,314(1+8.75) + 15% = $1,314/$1,000 + 15%

= 7.6% + 15% = 0.006%

Southwest Bancorp

Southwest Bancorp preferred stock paying a dividend of $2.50 and selling for $25.50. Return on Investment is 7%.

Preferred stock

Expected return = dividends/stock price = $2.50/$25.50 = 9.8%

Emerson Electric: Emerson Electric, common stock selling for $36.75, with a par value of $5. 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. Required rate of return is 15%.

Common stock

Expected return = dividends in year 1/stock price + growth rate

= $1.32(1 + 0.04) + 4% = $1.32/$36.75 + 4%

= 0.03 + 4% = 0.0007 or 7%

After analyzing, and doing some counting on these important investments I have decided to invest my money with Southwest Bancorp. This decision was made base on the price of the stock, and how much of the return on investment would be.