A company currently has $100 million in assets. One period from now, it will either have $124 million in assets or $90 million in assets, with the former having a 55.1% chance of occurring. The company also has $85 million that it must pay to its creditors one period from now. The managers of the company decide to increase the risk in order to increase the expected return for the stockholders. The probability of an "up-move" remains the same, but now the outcomes are changed to $141 million in assets or $36 million in assets. What is the company's expected return on assets from now until the end of Period 1 after it has decided to increase its risk level? Write your answer out to three decimal places - for example, write 2.5% and .025. Answer: This is pretty similar to what we did in class, but this time I'm asking you to explicitly calculate the expected return on assets. This is the same as any other percentage return calculation, where the expected future value factors in the probabilities of the possible outcomes. Your answer should reveal a pretty serious agency problem whereby the shareholders and the creditors (and other stakeholders such as employees) have very different objectives. The correct answer is: -0.061