Assume that there are three possible states of the economy: poor, moderate and booming. XYZ Corp...

Assume that there are three possible states of the economy: poor, moderate and booming. XYZ Corp expects to have $350,000 in sales in a poor economy, $500,000 in a moderate economy, and $900,000 in a booming economy. If the chances of a booming economy and poor economy are 10% each, what is the expected amount of sales for XYZ?

A. $500,000B. $512,500C. $525,000D. $621,000E. $805,0008.

Assume a fair coin and consider the following bet: heads I pay you two dollars, tails Which of the following statements is (are) correct?

A. $0B–$0.50C. $0.50D.–$1.00E. $1.00

Which of the following statements is (are) correct?

(x)Financial leverage is the use of debt to increase an investment position and increased financial leverage by a firm can increase the level of firm specific risk (unsystematic risk) for that business.

(y)Firms can quite possibly change their stocks' risk level by substantially changing their business.

(z)If a firm takes on less risky new projects over time, the firm itself will become more risky.

A.(x), (y) and (z)B.(x) and (y) onlyC.(x) and (z) onlyD.(y) and (z) onlyE.(z) only

Solutions

Expert Solution

1). Expected sales = sum of probability weighted sales

Total probability has to be 100% (or 1) so probability of a moderate economy are 100% - 10% -10% = 80%

Expected sales = (10%*350,000) + (80%*500,000) + (10%*900,000) = 525,000 (option C)

2). What is the bet for tails? Please re-post complete question.

3). Option B is correct - Statement (x) is true because increase in financial leverage beyond a point, will raise the risk for the firm. Statement (y) is correct because if a firm changes its business substantially then the nature of the business will change implying that the risk associated with the business is going to change as well which will be reflected in the stock.

jeff jeffy answered 1 year ago

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