John Is Trying to Decide Whether to Expand His Business

question 44

Multiple Choice

John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.John should:

• A) expand, since he expects to earn $320,000 by expanding, and it will only cost him $150,000 to do so.
• B) not expand, because there is a chance John will earn the same as if he didn't expand and would be out the $150,000 investment.
• C) not expand, since he expects to earn $120,000 more by expanding than not, and it will cost him $150,000 to do so.
• D) expand, since he has a 70 percent chance of earning more than the cost of expansion.

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Definitions:

Bond Issue

entails a corporation or government raising funds by selling bonds to investors, which are debt securities obliging the issuer to pay interest and repay the principal at maturity.

Public Markets

Places or platforms where securities, commodities, or other financial instruments are bought and sold openly, involving a wide range of investors.

Seasoned Equity Offering

The process of offering additional shares for sale by a company that has already gone public.

Treasury Stock

Shares that were issued and subsequently reacquired by the issuing company, now held in the company's treasury.