You are considering making an $5 million investment into Diamond Hands Technologies, but arent sure if it is about to go into bankruptcy. Your firm wants to maximize its expected profit. If Diamond Hands Tech goes into bankruptcy, you will lose your entire investment. But if the firm doesnt go under, you will get your investment back plus a return of 50% (so, $150 back for every $100 invested, for a profit of $50). Your accountants are examining Diamond Hands Technologies. The probability the accountants will catch a warning sign if the firm is about to go into bankruptcy is 75%. The probability that the accountants will identify a warning sign if the firm is not about to go into bankruptcy is 1/50. You think about 10% of all firms that you investigate are about to go into bankruptcy, and Diamond Hands Technologies is no different in this regard.

A) If your accountants identify a warning sign, what is the probability (0 to 1) the firm will go bankrupt?

B) If your accountants do not identify a warning sign, what is the probability the firm will go bankrupt?

C) Imagine the accountants identify a warning sign. What is your expected profit if you make this investment after observing a warning sign from your accountants? (Expected profit =Expected return minus investment amount). $:

D) What is your expected profit if you do the following: call the accountants, who will then tell you whether they see a warning sign or not, and then make the optimal investment decision, depending on whether you see a warning sign?