How would you recommend solving the problem


Problem

Incredible Inc. currently owes its creditors $1850. The manager Mr Jack Smith can manage it for a period at a personal cost of $670. It has assets that will generate $2750 with a probability of 0.7 (high state) and $1450 with a probability of 0.3 (low state) under Mr Smith's stewardship. Under any other management, the asset will have a sure liquidation value of $1500.

Assume risk aversion by the participants and the riskless rate is zero. Explain the effect on each participant. How would you recommend solving this problem? Justify your answer.

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Accounting Basics: How would you recommend solving the problem
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