Starting Right Corporation

Starting Right Corporation

There are four options for investors.
1) Corporate Bond
2) Preferred Stock
3) Common Stock
4) Do not invest

Total money Yield of $30000 invested Percentage After 5 years Favorable Market Unfavorable Market Favorable Market Unfavorable Market
Corporate Bond 13.00% 20,000 $25,273 $20,000 84.24% 66.67%
Preferred Stock 400% 50% $90,000 ($15,000) 300.00% -50.00%
Common Stock 800% 0% $210,000 ($30,000) 700.00% -100.00%
Do Not Invest 4.50% 4.50% $7,385 $7,385 24.62% 24.62%

In this simple case, we will remove the interest adjusted assumption and the time value of money
Also we are in the decision making under uncertainty environment since we do not know how the market will behave in the next 5 years

1) Sue Pan sky: very conservative

State of Nature
Alternatives Favorable Market Unfavorable Market Minimum Profit
Corporate Bond $25,273 $20,000 $20,000
Preferred Stock $90,000 ($15,000) ($15,000)
Common Stock $210,000 ($30,000) ($30,000)
Do nothing $7,385 $7,385 $7,385 $20,000 < Maximin Profit
Sue will choose to buy the company's corporate Bond

2) Ray Cahn: Success 11%

State of Nature
Alternatives Favorable Market Unfavorable Market Expected Profit
Corporate Bond $25,273 $20,000 $20,580
Preferred Stock $90,000 ($15,000) ($3,450)
Common Stock $210,000 ($30,000) ($3,600)
Do nothing $7,385 $7,385 $7,385
Coefficient of Realism alpha 0.11 0.89 $20,580 <Max Realism Profit

Ray will choose to invest in the corporate bond

3) Lila choose to invest (3 alternatives) very conservative

State of Nature Alternatives Favorable Market Unfavorable Market Minimum Profit
Corporate Bond $25,273 $20,000 $20,000
Preferred Stock $90,000 ($15,000) ($15,000)