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

question 78

Multiple Choice

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 decide 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 is closest to:

• A)$265 million.
• B)$280 million.
• C)$295 million.
• D)$300 million.

---

Definitions:

Present Value

The present worth of a future amount of money or a series of cash flows, discounted at a certain rate of return.

Annual Lease Payment

The total amount payable over a year under the terms of a lease agreement.

Operating Lease

An operating lease is a leasing agreement that allows the lessee to use an asset temporarily without transferring the risks and rewards of ownership.

Annual Rent Payments

Periodic payments made by a lessee to a lessor, often stipulated in a lease contract, to use a property for a specified term each year.