Investing in bonds or stocks can be one of the most important decisions an investor can make. Since Starting Right is a newly developed baby food company, the investment risks are high. There are three investment options that Right Corporation is offering to investors: corporate bonds, preferred stock, or common stock. Sue Pansky is a retired teacher considering investing in Starting Right. If Sue wanted to be considered as an investor, she would first have to qualify by having an annual income of $40,000 and a net worth of $100,000. If she qualified, Sue would have to evaluate her risk potential. If Sue wants to invest in the company with minimal risk, it would be advised that she invest in corporate bonds. Investing in corporate bonds would require Sue to loan an initial investment of $30,000 to Right Corporation. This investment would expect a return of 13% per year for the next five years, until the bond matures or the main principle investment is returned. Furthermore, Julia guarantees that Sue would get at least $20,000 at the end of five years. Corporate bonds are Sue’s best option, since it would minimize Sue’s risk and a guarantee payout of minimum $75,273 and a maximum payout of $75,273.
A commodities broker named Ray Cahn is also considering investing in Starting Right. Ray is optimistic and believes that there is probability of an 11% chance that the company will succeed. Because of his beliefs, Ray is willing to be more aggressive and is willing to take on a little more investment risk than Sue. If Ray qualifies as an investor, it would be recommended that Ray invest in preferred stocks. Preferred stocks convey characteristics of debt and equity and have a higher claim on assets and earnings than common stocks. Investing in preferred stocks would require Ray to loan an initial investment of $30,000 to Right Corporation. In a good market, Ray’s initial investment would be expected to increase by a factor of four; in a bad market, Ray’s initial investment would be expected to be cut in half. Furthermore, expected monetary value was calculated for all three investment options. It was determined that preferred stocks had the lowest expected monetary value of $-150, which would indicate the gain or in this case, loss that results from each investment decision. Due to all these factors, preferred stocks are Ray’s best option, since it would slightly minimize Ray’s risk and produce a minimum payout of $15,000 and a maximum payout of $120,000.
Lilia Battle, another investor is considering investing in Starting Right. Although Lilia believes Starting Right has a good chance of being successful, Lilia is a risk avoider. Because Lilia is conservative, she is not as aggressive as Ray and is not willing to take too much risk. If Lilia qualified, it would be advised that she invest in corporate bonds. Investing in corporate bonds would require Lilia to loan an initial investment of $30,000 to Right Corporation. This investment would expect a return of 13% per year for the next five years, until the bond matures or the main principle investment is returned. Furthermore, Julia guarantees that Lilia would get at least $20,000 at the end of five years. Corporate bonds are Lilia’s best option, since it would minimize Lilia’s risk and guarantee a favorable and unfavorable payout of $75,273. George Yates another potential investor believes that Start Right has an equally likely chance for success. If George qualifies as an investor, it would be advised he invest in common stocks. Common stocks would require the same $30,000 initial investment to the Right Start Corporation. George’s investment would have a maximum return of $240,000 if the market was favorable. If the market became unfavorable, George would be at risk of losing all his investment.
George’s best option is the common stocks. Common stock could still net George a maximum return of $210,000 at the end of five years. Peter Metarko is another investor that is extremely optimistic about the market for baby food. Since Peter is willing to take an aggressive risk in the market, it is recommended that he invests in common stocks. Common stocks would give Peter the maximum gain possible. Like George, the maximum gain Peter can attain over a period of five years is $ 240,000. Since common stock carries more risk, there is a possibility that Peter could lose his initial investment if the market becomes unfavorable. It is recommended that Peter investment in common stocks which will offer the most possible payout on investment of $240,000. Julia Day the founder of Start Right has been told that developing legal documents for each fundraising alternative is expensive. With the rising costs of developing legal documents for fundraising alternatives, she is considering eliminating one of the fundraising alternatives. All three alternatives currently give a fairly wide spectrum of options for both the aggressive and conservative investors. With the current group of investors, it is recommended that preferred stocks be eliminated. Although preferred stocks convey characteristics of debt and equity, corporate bonds and common stocks adapts to our cliental. This decision was determined based on out investor’s investment styles, needs and ability to take risks in the market.
Render, B., Stair, R., & Hanna, M., (2012). Quantitative Analysis for Management. New Jersey, Pearson.