Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed

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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Marketing For Financial Advisors

Authors: Eric Bradlow, Keith Niedermeier, Patti Williams

1st Edition

0071605142, 978-0071605144

More Books

Students also viewed these Finance questions

Question

6. Identify characteristics of whiteness.

Answered: 1 week ago

Question

e. What are notable achievements of the group?

Answered: 1 week ago