Two Types of Existing Houses Are for Sale: Ones with a Cracked

question 43

Multiple Choice

Two types of existing houses are for sale: ones with a cracked foundation and ones without.In all other respects,they are identical.Houses without cracked foundations are worth $200,000;those with cracked foundations are worth $200,000 minus the $20,000 to fix the crack,or $180,000.The frequency of solid foundations is 80%.Sellers know which type of house they have,but buyers cannot detect a crack.No seller must sell his house in order to move,and thus no one accepts anything less than the value of their house.
-Refer to the information above.Since not all owners of solid-foundation homes will be happy with the choice of removing their home from the market,they may instead

• A) simply keep it on the market indefinitely at $200,000.
• B) lower their price to $180,000.
• C) lower their price to $196,000.
• D) offer a warranty to fix any foundation problems that develop in the next 12 months.
• E) lower their price.

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Definitions:

Reverse Stock Split

A corporate action that consolidates the number of existing shares of stock into fewer, proportionally more valuable, shares.

Shares Outstanding

The sum of all shares of a company currently held by its investors, encompassing both large block holdings by institutional investors and shares that are under restrictions.

Liquidating Dividend

A type of dividend paid by a corporation out of its capital base, as opposed to its earnings, often signaling the company is dissolving.

Dividend Policy

A company's approach to distributing profits back to its shareholders, dictating how much to pay out as dividends and how often.