Question

In: Statistics and Probability

A manufacturing firm employs a CEO that experiences a 3/4 probability of successfully generating $10 million...

A manufacturing firm employs a CEO that experiences a 3/4 probability of successfully generating $10 million in revenue if she works hard. She only generates $1 million in revenue for her company with a probability of 1/4 if she works hard and loses the case. Alternatively, if this CEO does not work hard she only has a 1/4 probability of successfully generating $10 million in revenue. She experiences a 3/4 probability of only generating $1 million if she does not work hard. This CEO experiences costs of $250,000 if she works hard and costs of $150,000 if she does not. While she knows if she’s working hard, her company can not determine whether she is working hard when she is successful or when she fails.

a.) If the manufacturing company pays this CEO $150,000 above the market rate of $400,000 whether she succeeds or fails, will she have incentive to work hard? Explain.

b.) What is the CEO’s net earnings at this pay level?

c.) What is the company's expected profit for this situation?

Expert Solution

ans:

given data:

Prtobability of success generating= 1/4
Successfull generating in revenue= 10 millions
Experiences probability=3/4
Only generating experiences=$ 1 million
CEO experiences cost=$250000
she works hard and cost=$150000
market rate=$400000

a. here we have to find out the manufacturing company has pays this CEO$ 150000above the market rateof $ 4000000 whather she had succed or not:

If the CEO buckles down she should encounter 2,50,000$ of cost and If she doesn't she will experince 1,50,000$ of cost.
Presently the Profit of the frim doesn't have any connection with the CEO's motivators part and consequently
the CEO would dependably decide not to buckle down as the cost related with working not hard is only 1,50,000$ which is under 2,50,000$ cost on the off chance that she buckles down.
So except if some prportion of company's benefit is to be given to the CEO as motivating force/pay
the CEO will never buckle down as she generally needs to expand the compensation.

b) here we have to find out the CEO's net earning:

we already know the formula of CEO's net earning= Salary - Cost
Furthermore, in the above condition expressed in the event that a the net winning of the CEO.
Net earing of CEO is =400,000+150,000-150,000

Net earning = 400,000$

c) here we have top findout the company's expected profit:

Prtobability of success generating= 1/4
Successfull generating in revenue= 10 millions
Experiences probability=3/4
Only generating experiences=$ 1 million
As the CEO wouldn't buckle down the Firm's exp benefit is

Expected profit =(probability of generating)( generating in revenue)+( probability of experience)(generating experiences

Expected profit= 1/4*10 + 3/4*1

Expected profit = 3.25Mn$

As the benefit when president doen't buckles dwn has 1/4 th of prob of hitting 10 and 3/fourth of prob of hitting 1

orchestra answered 3 years ago

Parramore Corp has $10 million of sales, $3 million of inventories, $4 million of receivables, and...

Parramore Corp has $10 million of sales, $3 million of inventories, $4 million of receivables, and $3 million of payables. Its cost of goods sold is 85% of sales, and it finances working capital with bank loans at an 6% rate. Assume 365 days in year for your calculations. Do not round intermediate steps. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places. days If Parramore could lower its inventories...

A firm can be worth $100 million (with 20% probability), $200 million (with 60% probability), or...

A firm can be worth $100 million (with 20% probability), $200 million (with 60% probability), or $300 million (with 20% probability). The firm has one senior bond outstanding, promising to pay $80 million. It also has one junior bond outstanding, promising to pay $70 million. The senior bond promises an interest rate of 5%. The junior bond promises an interest rate of 26%. If the firm’s projects require an appropriate cost of capital of 10%, then what is the firm’s...

A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes...

A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 3.5/9, net 25. What change might be expected on the Decreased receivables and increased bank loans. Increased receivables and increased bank loans. Decreased payables and increased bank loans. Increased payables and increased bank loans.

Mulligan Manufacturing (MM) is a fast growing firm with expected earnings of $3 million next year....

Mulligan Manufacturing (MM) is a fast growing firm with expected earnings of $3 million next year. MM expects earnings to grow 10% per year indefinitely and MM’s cost of capital is 14%. MM has creative accounts, so it pays no taxes. What is the market value of MM? If MM has no debt, then what is its P/E ratio? If MM has $25 million in debt with an interest rate of 8% (cost of capital (WACC) remains 14%), what is...

3. On 1/1, a manufacturing firm plans to borrow $100M in 4 months to build a...

3. On 1/1, a manufacturing firm plans to borrow $100M in 4 months to build a factory. The loan will last one year. A different financial institution is offering a Eurodollar FRA at 5% starting in 4 months and lasting for 3 months on a notional principal of $100M. Assume the bank’s actual loan is at LIBOR+0.5% (annual rate) and interest is compounded and paid quarterly. For the day count convention just assume N/360 is .25 for a quarter. Note...

Material A is generating heat at a rate of 11.25 x 10^3 W/m^3 and is 40cm...

Material A is generating heat at a rate of 11.25 x 10^3 W/m^3 and is 40cm thick and has a thermal conductivity of 10 W/mK. Material B is 50 cm thick with an unknown thermal conductiviy. material C is 30 cm thick and has an unknown thermal conductivity. The structure is cooled by a fluid on both sides at 25 (C) with a heat transfer coefficient of 100 W/m^2K. If your thermocouples measure T1 to be 145 (C) and T2...

CUSTOM FABRICATIONS Inc. is a bicycle manufacturing firm founded in 2000 that currently employs 126 people....

CUSTOM FABRICATIONS Inc. is a bicycle manufacturing firm founded in 2000 that currently employs 126 people. The company produces custom bicycles in its factory located near Los Angeles, CA. Each bicycle is tailored to a rider based on a number of different measurements, including height, weight, inseam, and arm length. These measurements are taken at 30 professional bicycle shops around Southern California, which are certified to size CUSTOM FABRICATIONS cycles. By accepting orders only through licensed dealers, CUSTOM FABRICATIONS ensures...

Cash Discounts Suppose a firm makes purchases of $3 million per year under terms of 3/10,...

Cash Discounts Suppose a firm makes purchases of $3 million per year under terms of 3/10, net 30, and takes discounts. Assume 365 days in a year for your calculations. Do not round intermediate calculations. What is the average amount of accounts payable net of discounts? (Assume that the $3 million of purchases is net of discounts - that is, gross purchases are $3,092,784, discounts are $92,784, and net purchases are $3 million.) Round your answer to the nearest dollar....

Parramore Corp has $10 million of sales, $3 million of inventories, $3 million of receivables, and...

Parramore Corp has $10 million of sales, $3 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 7% rate. Assume 365 days in year for your calculations. Do not round intermediate steps. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places. days If Parramore could lower its inventories...

10. As CEO of firm A, you and your management team face the decision of whether...

10. As CEO of firm A, you and your management team face the decision of whether to undertake a $200 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 40 percent chance of successfully creating the drug. Success means securing a worldwide patent worth $550 million (implying a net profit of $350 million). However, firm B (your main rival) has just announced that it is spending $150 million to pursue development of the...