Use the following information to answer the question(s) below.

Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million.

-The expected return for Nielson Motors stock without leverage is closest to:
A)-25.0%.
B)-17.5%.
C)-12.5%.
D)12.5%.

Question

Use the following information to answer the question(s) below.
	
Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million.

-The expected return for Nielson Motors stock without leverage is closest to:
A)-25.0%.
B)-17.5%.
C)-12.5%.
D)12.5%.

Quizplus · Accepted Answer

The expected value of the assets in one year is (0.5 * $600 million) + (0.5 * $300 million) = $450 million. The expected return is ($450 million - $400 million) / $400 million = 12.5%.

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