You have won a lottery. You will receive $200,000, after taxes, each year for th

Question

You have won a lottery. You will receive $200,000, after taxes, each year for the next 5 years. Describe the process you will go through in determining how to invest your winnings. Consider at least two options and make a choice. You may consider the stock of a certain company, bonds, real estate investments, bank deposits, and so on. Be specific. What information do you need to make a final decision? how will your decision be affected by th fact that you will receive the winnings over a five-year period rather than in one lump sum? Would you prefer on payment? Explain

Explanation / Answer

There are 5 steps involved in this problem: 1) Formulate the question: For about the same amount I pay in a year for a company's products ($200,000) I could buy 4000 shares of stock at $50 per share. Should I invest this $200,000 in the company? 2) Gather the financial information: The information will come from a variety of sources: a) My personal finances at the present time b) Alternative uses for the $200,000 c) The outlook for the industry d) Publicly available information about the company, including its financial statements. 3) Analyse the financials: The information in the financial statements can be used to perform a) Ratio Analysis (looking at relationships among financial statement items) b) Horizontal Analysis (looking at trends over time) c) Vertical Analysis (Comparing financial statement items in a single period) d) Comparisions with competitors e) Comparisions with industry averages. 4) Make the decision: Taking into account all of the various sources of information, you decide either to: a) Use the $200,000 for something else b) INvest the $200,000 in the company 5) Interpret the Results: If we decide to invest, we want to monitor our investment periodically. Whether you made a good decision will be based on the answers to these two questions. Have I received any dividends on shares? Has the price of the stock increased $50 per share that I paid? Let us assume that we receive a lumpsum of ($200,000 * 5 = $1,000,000) at a time. If this amount is invested either in stocks or bonds, we receive either Dividends or coupon payments. But before that we have the analyse the above criteria. If the lumpsum amount is invested in a single alternative, the profit that will be obtained depends on the growth prospects of the company. If the company is not doing good or went into losses, the whole investment will be wasted. It is better to receive the money in terms of payments because we can have the option to choose certain profitable investments or by choosing a portfolio of investments. Even though if one option generates loss, the others will be profitable. A critical step in this framework is gathering information from the financial statements, the means by which an accountant communicates information about a company to those interested in it.

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