If managed effectively, Rearden Metal will have assets with a market value of $2

Question

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. What is the expected value of Rearden's assets if it were run efficiently? $295 million $300 million $280 million $265 million

Explanation / Answer

Calculation of expected value of Rearden's assets if it were run effciently Market value Probability Multiplication 200                     0.33                      66.67 300                     0.33                    100.00 400                     0.33                    133.33 Expected value of an asset                    300.00 The answer is option B

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