Financial Management - Case Study Example

Financial Management Case Study1) Value of Investment Options based on Required Rates of Return.Bank of Canada Investment OptionSelling Price of Bond = $1020Par value, M= $1,000Interest, I= 6.35% * $1,000= $63.50Required rate for return for bond, Kd = 5%Maturity period, n=5Bo, Present value of one bond= I*(PVIFA Kd n) + M (PVIF Kd n) = 63.50*(PVIFA 5%5yrs) + M (PVIF 5%5yrs) = 63.50 (4.3295) + 1,000 (0.7835) =274.

92325 +783.5 =$ 1058.42By investing $ 10,000, Value of Investment = (10,000/1020)*1058.42 =$ 10,376.70Southwest Bancorp Investment OptionSelling price of Preferential Stock = $26.25Dividend for Preferential Stock, Dp = $2.63Required rate of return for Preferential Stock, Kp= 8%Value of 0ne Preferential Stock Vp, = (Dp/Kp)=2.63/0.08= $32.875By investing $ 10,000, Value of Investment= (10,000/26.25)*32.875 = $12,523.

80Emerson Electric Investment OptionSelling price of Common Stock = $52Dividend for Common Stock, D1= $ 1.60Required rate of return for Common Stock Ks= 12%Growth rate, g = 5∫ (3.3/2.23)-1 =0.082 = 8.2%Value of One Common Stock, Po = D1/ (Ks - g) = 1.60/ (12% - 8.2%) = 1.60/ (0.038) = $ 42.11By investing $ 10,000, Value of Investment= (10,000/52)*42.11 = $8,097.172) I would opt for the Southwest Bancorp Investment Option because Preferential stocks are a relatively risk free and productive investment option.

Additionally, it is the investment option that has yielded the most value with a return of $ 2,523.80 on the initial investment of $ 10,000.3) If growth rate, g = 9.2% Value of One Common Stock, Po = D1/ (Ks - g) = 1.60/ (12% - 9.2%) = 1.60/ (0.028) = $ 57.14 By investing $ 10,000, Value of Investment = (10,000/52)*57.14 = $10,988.46In terms of long term investment plans, I would opt for the Emerson Electric Investment Option, but if my investment plan is short plan, I would stick with the Southwest Bancorp Investment Option.4) The problem with investing in bonds is that they are not very productive.

Bonds yield very small amounts of return value and it is wise to not solely depend on them as a long term investment option.According to Kanuk, the risk of investing in preferential stock is that in the event of bankruptcy, the companies can suspend paying dividends (Kanuk, 2007).The risks of common stocks include fluctuating prices of the shares due to interest rates and inflation levels. Common stocks are very risky and require investor patience and shrewdness in order to earn yields in the long run.

ReferencesKanuk, A. (2007). Capital markets of India: An investor's guide. Hoboken, N.J.: John Wiley & Sons.