Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Question 5: Do this in Excel. (10 points) You are the CEO of a firm. Your firm is struggling to keep up with environmental standards
Question 5: Do this in Excel. (10 points) You are the CEO of a firm. Your firm is struggling to keep up with environmental standards and really needs to invest in some up-to-date equipment. The equipment would cost you $10,000 every year for the next 10 years. Your interest rate is 5%. Alternatively, you can hope that you don't get caught polluting the environment. There is a 25% chance you get caught in three years and the whole scandal will be publicized. In that case, you have to not only pay $200,000 of legal fees and fines, but your reputation will suffer immensely, leading to a $4,000 decrease in sales for the rest of the firm's life (i.e. forever: public corporations are assumed to live forever.) There is also a 25% chance you get caught in one year, but the scandal will not be publicized. In that case, you are only paying $80,000 of fees and fines. There is a 50% chance you do not get fined. If you invest in new equipment, you will definitely not get fined. a) What would maximize your present value? What do you think the CEO should do? b) What does this tell you about the stakeholder vs. shareholder conflict? Question 5: Do this in Excel. (10 points) You are the CEO of a firm. Your firm is struggling to keep up with environmental standards and really needs to invest in some up-to-date equipment. The equipment would cost you $10,000 every year for the next 10 years. Your interest rate is 5%. Alternatively, you can hope that you don't get caught polluting the environment. There is a 25% chance you get caught in three years and the whole scandal will be publicized. In that case, you have to not only pay $200,000 of legal fees and fines, but your reputation will suffer immensely, leading to a $4,000 decrease in sales for the rest of the firm's life (i.e. forever: public corporations are assumed to live forever.) There is also a 25% chance you get caught in one year, but the scandal will not be publicized. In that case, you are only paying $80,000 of fees and fines. There is a 50% chance you do not get fined. If you invest in new equipment, you will definitely not get fined. a) What would maximize your present value? What do you think the CEO should do? b) What does this tell you about the stakeholder vs. shareholder conflict
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started