John Smith is married and has four kids. He is the sole breadwinner in his family. His annual income is $110,000. His familys annual expenses are $90,000. He has an emergency fund of a little over $37,000 that he figures would cover him for five months if his income stopped. Recently, he inherited $400,000.

Mr. Smith is a big fan of carbonated drinks. With the money he inherited, and only that money, hes considering either starting his own soda company, called Soda Rocks!, or buying shares of stocks in an existing company, such as Coca-Cola or Pepsico, Inc. (referred to from now on as Pepsi).

1. What are the similarities between opening Soda Rocks! and investing (by buying stocks) in an existing company? Mark all that apply. In both cases

He owns a percentage (0%-100%) of the company

He gets to vote for the board of directors

He gets to participate in day-to-day management decisions

If the company declares a dividend, he will get money

He can decide how much a dividend the company will pay

He can quickly and easily sell his shares in the company

2. John decides to invest his inheritance by buying stocks in existing large companies instead of creating Soda Rocks! What could be possible reasons for this move?

A. He doesnt want to pay his health insurance and would rather sign up for the company whos stocks he owns health care plan, since whenever you own stock in a company you are entitled to sign up for their health care plan.

B. He wants to be able to hire his friends and family in the company

C. He doesnt want to take on the day-to-day management responsibilities of owning a company.

D. He wants to get a corporate pension when he retires, since anyone who owns shares in a company is entitled to a pension at retirement.