Evaluating Alternative Investments
Rob Lowe would like to invest $100,000 in Franklin Inc., which is offering common stock, preferred stock, and bonds on the open market. The common stock has paid $1 per share in dividends for the past three years, and the company expects to be able to double the dividend in the current year. The current market price of the common stock is $10 per share. The preferred stock has an 8% dividend rate. The bonds are selling at par with a 5% stated rate.
Required
1. Explain Franklin’s obligation to pay dividends or interest on each instrument.
2. Recommend one type of investment over the others to Rob and justify your reason.
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