The Crystal Window Company Makes Windows at Three Locations: Reno

question 2

True/False

The Crystal Window Company makes windows at three locations: Reno, Las Vegas, and Boise. Some windows made by the company contain a visible defect and must be replaced. Each defect costs the company $45.00. The Reno plant makes 40 percent of all windows while the Las Vegas and Boise plants split the remaining production evenly. A recent quality study shows that 8 percent of the Reno windows contain a defect, 11 percent of the Las Vegas windows contain a defect, while 4 percent of the windows made in Boise have a defect. Once the windows are made, they are shipped to a central warehouse where they are commingled and the location where they were made is lost. Based on this information the probability that a defective window was made by the Boise plant is approximately 0.16.

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Definitions:

Cost of Equity

The return that investors require for an investment in a firm's equity, representing the compensation for bearing risk.

Growth Rate

The rate at which a company's earnings or revenue increases over a specified period.

Required Return

The minimum rate of return that investors expect or require from an investment to make it worthwhile.

Annual Dividend

The total dividend payment a company makes to its shareholders in a year.