Calvin, whose tax rate is 35% and 15% for ANCG, is
considering two alternative investments on January 1, 20Yl. He can purchase
$100,000 of 10% bonds due in five years or purchase $100,000 of Hobbes, Inc.
common stock. The bonds are issued at par, pay interest annually on December
31, and mature at the end of five years. Interest received can be reinvested at
10%. Assume that he knows with relative certainty that the value of the stock
will increase 8% each year (i.e., the value of the Hobbes stock will be
$108,000 at the end of 20Yl) and the interest and principal for the bonds will
be paid as scheduled. On December 31, 20Y5, he will sell the stock or receive
the bond principa l plus the last interest payment. Which alternative should
Calvin select if he wants to have the greater amount of money as of January 1,
20Y6? Provide supporting information for your answer.
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