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Jude owns a house worth $250,000 in an area that is prone to tornadoes. Suppose there is a 5 percent chance during the next year that Jude's house will incur $50,000 of damage from a tornado and a 1 percent chance that his home will be completely destroyed by a tornado. Suppose an insurance company offers him a policy that fully reimburses him in the event that his home is damaged by a tornado. The insurance company charges a $10,000 premium for this policy. Which of the following statements is true?The expected value of Jude's home when he buys insurance is higher than the expected value if he does not buy insurance.If Jude is risk neutral, he will prefer to not buy insurance.Economists would say it is irrational to purchase the insurance.
Rights Offerings
A method by which a company raises capital by giving existing shareholders the right to buy additional shares at a discount.
Market Value
The existing market price for the acquisition or sale of an asset or service.
New Equity Offering
A financial process where a company issues new shares to the public or existing shareholders to raise capital.
Outstanding Shares
The cumulative count of a corporation's shares that have been distributed and are presently held by investors.
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