Starting Right Corporation

In: Business and Management

Submitted By beabruan
Words 1089
Pages 5
Starting Right Corporation
Case Solution

Following assumptions regarding the case: • Although there are only three investment options (corporate bonds, preferred stock, and common stock), there is actually a fourth option: to not invest at all. • There are only two states of nature, either the market is favorable or unfavorable. • The minimum initial investment for any investment type is $30,000. When studying the options, we will use $30,000 as the principal amount. • To invest in Starting Right, each investor is required to have an annual income of at least $40,000 and a net worth of $100,000. • Compounding of interest will not be factored into the analysis. • Figures are evaluated on an annual basis, instead of on a five-year basis.

Using QM for Windows results in the payoff table below. The values entered into the payoff table represent the profits or losses that are expected to be obtained. For example, if someone were to invest $30,000 in preferred stock, either he may gain a maximum of 90,000 or he may lose $15,000.

|Data |States of Nature | |Results | | |
| |Favorable |Unfavorable |EMV | Row Min | Row Max | Hurwicz |
|Probabilities |0.5 |0.5 | | | | |
|Corporate Bond |3,900 |-10,000 |-3,050 |-10,000 |3,900 |-8,471 |
|Preferred Stock |90,000 |-15,000 |37,500 |-15,000 |90,000 |-3,450 |
|Common Stock |210,000 |-30,000 |90,000 |-30,000 |210,000 |-3,600 |
|Do Nothing |0…...

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