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Harbin Corporation wants to hire Deshane as a CEO and offers him two options as part of a compensation package: $1,000,000 in cash today or
Harbin Corporation wants to hire Deshane as a CEO and offers him two options as part of a compensation package: $1,000,000 in cash today or shares of Harbin's stock, which are expected to be worth $3,000,000 in five years. To make the decision, which of the following formulas should Deshane use to find the expected return on $1,000,000? (Expected Value Investment)^1/5 (Expected Value Investment) - 1 (Expected Value Investment)^1/5 - 1 Deshane calculates that the expected return on investing $1,000,000 should be at least to match the stock in five years. Suppose now that Deshane believes that with 25% probability Harbin Corporation will perform poorly during the next five years, and its shares will be worth nothing instead of $3,000,000. How would this affect Deshane's calculations of the expected return? The expected return will be calculated as 25% times 75% - 1.00% times 25%. The expected return will be lower, because there is only 25% probability that shares will be worth $1,000,000 in five years. The expected return will remain the same, because even if Harbin Corporation goes bankrupt, Deshane will be able to sell his shares in the secondary market
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