Question

How much, on average, do you expect to gain by

investing $4,120 to buy the stock, you have to pay a $120 non-refundable service charge. There is a 60% chance that the firm will be bought by a large computer firm next year. If that is the case, there is a 50% chance that the stock holders will be bought out at double the present stock price, and a 50% chance that the stock holders will be bought out at 150% of the present stock price. If the firm is not bought by the large company, there is a 50% chance that the firm’s stock value will stay the same, and a 50% chance that the firm will go broke. If the firm goes broke, its stock will be totally worthless.

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