Your Sister Is Thinking About Starting a New Business

question 45

Multiple Choice

Your sister is thinking about starting a new business.The company would require $375,000 of assets,and it would be financed entirely with common stock.She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital,which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?

• A)$41,234
• B)$43,405
• C)$45,689
• D)$48,094
• E)$50,625

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Definitions:

Risk-loving

A preference or inclination for taking on risks where the potential for gains outweighs the potential losses, as opposed to risk-aversion.

Risk-averse

describes an individual or entity that prefers to avoid risk and opts for the option with the least uncertainty.

Risk Premium

The additional return expected by an investor for taking on a higher level of risk compared with a risk-free investment.

Utils

A hypothetical unit of measurement used in economics to quantify the amount of utility or satisfaction gained by consuming goods and services.