Use the Following Information to Answer the Question(s) Below

question 61

Multiple Choice

Use the following information to answer the question(s) below.
If managed effectively, Rearden Metal will have assets with a market value of $200 million, $300 million, or $400 million next year, with each outcome being equally likely. Managers, however, may decided to engage in wasteful empire building, which will reduce Rearden'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%, 5%, and 45% respectively.
-Suppose that the managers at Rearden Metal will engage in empire building unless that behavior increases the likelihood of bankruptcy.If Rearden has $190 million in debt due in one year,then the expected value of Rearden's assets are closest to:

• A) $265 million
• B) $280 million
• C) $295 million
• D) $300 million

---

Definitions:

Held to Maturity

A designation for financial assets which a company has the intention and ability to hold until a specified maturity date.

Available-For-Sale Securities

Financial assets that are purchased with the intent of selling before they reach maturity or when favorable market conditions exist.

Short-Term Investments

Assets that are expected to be converted into cash, sold, or consumed within one year or within the operating cycle, whichever is longer.

Long-Term Investments

Investments that are not readily marketable or that management does not intend to convert into cash within the next year or operating cycle, whichever is longer.