Use the Information for the Question(s) Below

question 21

Multiple Choice

Use the information for the question(s) below.
If it is managed efficiently, Luther Industries will have assets with a market value of $100 million, $300, million, or $500 million next year, with each outcome being equally likely. Managers may, instead, engage in wasteful empire building which will reduce the firm's market value by $20 million in all cases. Managers may also increase the risk of the firm, changing the probability of each outcome to 50%, 20%, and 30% respectively.
-If it is managed efficiently,then the expected market value of Luther's assets is closest to:

• A) $300 million
• B) $260 million
• C) $240 million
• D) $280 million

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Definitions:

Cost of Debt

is the effective rate that a company pays on its total debt, an important component in calculating the cost of capital.

Security Market Line

A graphical representation of the risk-return trade-off for individual securities, illustrating the capital asset pricing model (CAPM).

Risk-free Rate

The yield from an investment that carries no risk of losing money.

Expected Return

Return on a risky asset expected in the future.