6.16 A sportswear company markets a premium brand of trainers. At present the revenue from sales of these trainers is £17 m a year. They have been negotiating with representatives of a top US sports star in order to obtain his endorsement of the product. The cost to the company of the endorsement would be £3 m a year, a cost that would be met from the sales revenue from the trainers. If the star endorses the trainers the company expects that the sales revenue will rise to £30 m a year. However, just as the deal is about to be signed a regional US news agency runs a story alleging that the star has taken bribes. The sportswear company understand from their US representatives that there is a 60 per cent chance that the star will be able to refute the allegation, in which case sales of the trainers will still be £30 m. If the star is unable to refute the allegation the negative publicity is likely to reduce sales revenue from the trainers to £10 m a year.

(a) Should the company cancel or complete the endorsement deal?

(b) What should the company do if the chance of the star refuting the allegation is 40 per cent?