10. Looking forward or looking backward at returns Aa Aa Harbin Corporation want

Question

10. Looking forward or looking backward at returns Aa Aa Harbin Corporation wants to hire George as a CEO and offers him two options as part of a compensation package: (1) $400,000 in cash today or (2) shares of Harbin's stock, which are expected to be worth $1,000,000 in two years To make the decision, which of the following formulas should George use to find the expected return on $400,000? O (1,000,000/$400,000)1/2 1 O (1,000,000 /$400,000)1/2 O (400,000/$1,000,000)1/2- 1 George calculates that the expected return on investing $400,000 should be at least stock in two years. (Hint: Enter the answer as the percentage value; round to the whole number.) to match the Suppose now that George believes that with 10% probability Harbin Corporation will perform poorly during the next two years, and its shares will be worth $500,000 instead of $1,000,000. How would this affect George's calculations of the expected return? The expected return will be 1%. The expected return will be 53%. The expected return will be 17%. QNA 315 ? 2013 2004 2016 Apia. Al ghte reserved.

Explanation / Answer

1> A is the correct answer.

Reason

Since the gap is 2 years.we have to take the exponent 0.5 and subtracting 1 is to get the return.

2> The return is 58.11%

3> The expected share price is 0.1x500,000+0.9x1000000=950,000

So, the return will be (950/400)^0.5-1

Option B is true.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.