$300 million, or $400 million next year, with each outcome being equally likely. Managers may
increase the risk of the rm, changing the probability of each outcome to 50%, 5%, and 45%
1. What is the expected value of Rearden's assets if it were run eciently?
2. Suppose that the managers at Rearden Metal can increase risk to maximize the expected
payo to equity holders. If Rearden has $180 million in debt due in one year, what is the
expected value of the company's assets? Will they increase the company's risk?
3. Suppose now that the company has a $230 million in debt due in one year. Does your
answer to the previous question change? Explain.
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