A company has a cost of goods of 60% of the selling price of its products. It has $200,000 in fixed overhead for administrative expenses, rent and salaries. In addition, it spends 18% of every sales dollar on marketing.
Based purely on the financial return, and not factoring risk (think about this--what creates risk?), would the investor have been better off loaning the company $500,000 at 10% interest, to be paid back over ten years at $50,000 per year in principle plus interest, or agreeing to be paid out of profits each year at the rate of 30% of profits?