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Iteru [2.4K]
3 years ago
13

Suppose that the managers at Rearden Metal will increase risk to maximize the expected payoff to equity holders. Of Rearden has

$230 million in debt due in one year, then the expected value of Rearden assets are closest to:
A) $900 million
B) $280 million
C) $300 million
D) $295 million
Business
1 answer:
Allisa [31]3 years ago
4 0

Answer:

D) $295 million

Explanation:

I can say that based on the information provided within the question the expected value of the Rearden assests are close to $295 million. This would be calculated as the following.

Expected Payoff to equity holders w/o increase in risk:

Equity = 1/3($200 - $200) + 1/3($300 - $230) + 1/3($400 - $230) = $70 million

Expected Payoff to equity holders w/increase in risk:

Equity = (50%)($200 - $200) + (5%)($300 - $230) + (45%)($400 - $230) = $80 million

Therefore Rearden's managers will increase the risk and the expected value of Rearden's assets is:

assets= (50%)($200) + (5%)($300) + (45%)($400) = $295 million

I hope this answered your question. If you have any more questions feel free to ask away at Brainly.

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