Suppose that the price of the common shares is negotiable but that the price of the mutual fund investment is fixed at $15,000.

What is the most the Mr. Smart will pay for the common stock based on the decision tree and probabilities in Figure (i.e., before any additional information is acquired).

[Hint: (1) Note that the cash flows for each investment are net of investment, where net cash flow = gross cash flow amount invested. Thus, the less you pay for the common shares, the more the net cash flows. (2) It will be easiest to use Excels Goal Seek function to get the numerical solution.]

Figure 3.5 Decision Tree for Mr. Smart's Problem Action State Probability Net Payoff Good 0.50 $8,000 Buy common shares Bad 0.50 $1,000 Invest $15,000 Good 0.50 $5,000 Buy mutual fund Bad 0.50 $2,000