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

question 78

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 decide 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 $180 million in debt due in one year,then the expected value of Rearden's assets is closest to:

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

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Definitions:

Capitalized

The process of recording a cost or expense on the balance sheet for the purposes of delaying full recognition of the expense over time through depreciation or amortization.

Raze

To completely tear down or demolish a building or structure.

Lump Sum

A single payment made at a particular time, as opposed to several smaller payments or installments.

Appraised Values

Estimated values given to property or assets by a qualified professional to determine their worth at a specific point in time.