Refer to the Following:
a Firm Is Considering the Decision $\text { The economy }$

question 46

Multiple Choice

Refer to the following:
A firm is considering the decision of investing in new plants. The following is the profit payoff matrix under three conditions: it does not expand, it builds two new plants, or it builds one new plant. Three possible states of nature can exist--no change in the economy, the economy contracts and the economy grows. The firm has no idea of the probability of each state.
$\text { The economy }$
$\begin{array}{lccc} & \text { expands } & \text { contracts } & \text { unchanged } \\\hline \text { no new plants } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 4 \text { million } \\1 \text { new plant } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 6 \text { million } \\2 \text { new plants } & \$ 40 \text { million } & -\$ 12 \text { million } & \$ 8 \text { million }\end{array}$
-What decision would be made using the maximin rule?

• A) no new plants
• B) one new plant
• C) two new plants
• D) not enough information to tell

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Definitions:

Dividend Payout Ratio

A financial metric that shows the percentage of a company's earnings paid out to shareholders as dividends over a period.

Debt-Equity Ratio

A measure of a company's financial leverage, calculated by dividing its total liabilities by its shareholders' equity, indicating the proportion of debt used to finance assets.

Additional Debt

This refers to any extra borrowing taken on by an entity beyond its existing debt obligations.

Operating Capacity

The maximum output that a business can produce using its current resources and facilities without additional investment.