Use the following information to answer the question(s) below.
If managed effectively, Rearden Metal will have assets with a market value of $200 million, $300 million, or $400 million next year, with each outcome being equally likely. Managers, however, may decided to engage in wasteful empire building, which will reduce Rearden's market value by $20 million in all cases. Managers may also increase the risk of the firm, changing the probability of each outcome to 50%, 5%, and 45% respectively.
-Suppose that the managers at Rearden Metal will engage in empire building unless that behavior increases the likelihood of bankruptcy.If Rearden has $180 million in debt due in one year,then the expected value of Rearden's assets are closest to:

Question

Quizplus · Accepted Answer

B) In all cases Rearden will be able to pay off its debt and avoid bankruptcy if it engages in empire building, even in the worse case they will have $200 million - $20 million = $180 million in assets.
The expected value is just the weighted average of the possible outcomes.
E[assets] = 11ea7e54_8ca8_1691_ba34_db820bf0b188_TB1620_11 ($200 - $20) + 11ea7e54_8ca8_1692_ba34_eb42c8ef7286_TB1620_11 ($300 - $20) + 11ea7e54_8ca8_1693_ba34_1f3f957f4ca6_TB1620_11 ($400 - $20) = $280 million

Use the Following Information to Answer the Question(s) Below