IN THE TEXT -O'Reilly Is a Masterful Lottery Player.The Megamillion Jackpot Is Now

question 98

Essay

IN THE TEXT
-O'Reilly is a masterful lottery player.The megamillion jackpot is now up to $200 million.If O'Reilly wins the jackpot,he has a choice of receiving $200 million in 5 years or a smaller lump sum currently.Advise O'Reilly on his choice under the following scenarios.Which option should he take and why? Use Exhibit 3.1.
a.O'Reilly's after-tax return is 10%.If he chooses the current lump sum option,the lottery will pay him $130 million.
b.O'Reilly's after-tax return is 10%.His current tax rate will be 35% if he receives the lottery payment now.His expected tax rate in five years will be 40%.If he chooses the current lump sum option,the lottery will pay him $100 million.

Identify and decide when to use parameters versus statistics.

Understand the impact of sample size on statistical measures.

Recognize calculations errors specifically with variance and standard deviation.

Understand the effect of outliers on statistical measurements.

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Definitions:

Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock, often with fixed dividends.

Treasury Stock

Shares that were issued and subsequently reacquired by the issuing corporation, reducing the number of shares outstanding in the market.

Gain On Sale

The profit realized from the sale of an asset, when the selling price exceeds its original purchase price.

Paid-In Capital

Paid-In Capital is the amount of money that shareholders have invested in a company through the purchase of stock, exclusive of earnings retained in the business.