Refer to the Normal-Form Game of Advertising Shown Below Suppose There Is a 10 Percent Chance That the Advertising

question 33

Multiple Choice

Refer to the normal-form game of advertising shown below. $\begin{array}{c}\quad\quad\quad\quad\quad\quad\text { Firm B}\\\text { Firm A }\begin{array}{|l|l|l|} \hline & \text { Advertise } & \begin{array}{l}\text { Do Not } \\\text { Advertise }\end{array} \\\hline \text { Advertise } & \$ 0, \$ 0 & \$ 175, \$ 10 \\\hline \begin{array}{l}\text { Do Not } \\\text { Advertise }\end{array} & \$ 10, \$ 175 & \$ 125, \$ 125\\\hline\end{array}\end{array}$ Suppose there is a 10 percent chance that the advertising game depicted in Figure 10-17 will end next period.What is the present value to firm A of agreeing to the strategy {do not advertise,do not advertise}?

• A) $125
• B) $237.50
• C) $1,250
• D) None of the preceding answers is correct.

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Definitions:

Quote Sheet

A document or digital view listing the price quotes for various financial instruments or commodities, often used in trading.

Convertible Bond

A type of bond that can be converted into a predetermined amount of the company's equity, usually at the discretion of the bondholder.

Market Conversion Value

The current market value of a convertible security if it were converted into the underlying shares of stock today.

Conversion Ratio

The conversion ratio is the number of shares an investor receives when converting a convertible security, such as a convertible bond or preferred stock, into common stock.