Case: Starting Right Corporation
|1. Sue Pansky | |Alternatives |States of Nature | | |Profit or loss in |Profit or loss in | | |Favorable Market |Unfavorable Market | |Corporate Bond(a) |25,273 |15,273 | |Preferred Stock |90,000 |-15000 | |Common Stock |210,000 |-30,000 | |Do saving (b) |7,385 |7,385 |
Sue is a pessimistic investor, so choose the alternative (including doing saving instead of investing) that will reflect the maximum of the minimum payoffs that is the Corporate Bond of 15,273. a: Profit in Favorable Market: Future Value of corporate bond interests paid on 13% coupon rate annual basis in 5 years=25,273. Profit in Unfavorable Market = (minimum principle + interests) – initial investment= =20,000+25,273-30,000=15,273
b: Inflation rate would increase by 4.5% each year, so deposit the initial amount to saving tools which are provided also 4.5% interest rate each year in 5 years.
|2. Ray Cahn | | ...