You are trying to decide whether to buy stock in Company X or Company Y. Both companies need $1000 capital investment and will earn $200 in good years (with probability 0.5) and $60 in bad years. The only difference between the companies is that Company X is planning to raise all of the $1000 needed by issuing equity while Company Y plans to finance $500 through equity and $500 through bonds on which 10% interest must be paid.
Construct a table showing the expected value and standard deviation of the equity return for each of the companies. (You could use Table 8.3 as a guide.) Based on this table, in which company would you buy stock? Explain your choice.