Answered: Which of the following is Katie's best…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Katie Lee had a car accident and was out of work for a year. Katie's parents believe that the accident was caused by a vehicle defect. Her family consulted some lawyers and planned to sue the vehicle manufacturer for $3.5 million. During negotiations, the legal team of the vehicle manufacturer offered a $700K settlement. Katie's family was advised that they would need to settle the $100K in legal fees if they agree to the settlement. Katie's parents asked their lawyer for advice and their lawyer told them that they have a 50% chance of winning the case. If the decision favors the vehicle manufacturer, Katie's family loses and will have to pay legal fees to the tune of $75K. However, they were cautioned that even the decision favors Katie, the full requested settlement is not guaranteed. The lawyer believes that there is a 50% chance that Katie's family would receive the full settlement amount they requested, of which Katie needs to settle $1.5 million in legal fees. There is a 50% chance that the jury will award Katie $1 million, of which 50% will be taken up by legal fees.

Which of the following is Katie's best option?

a.) Katie should not accept the settlement and sue the company. She will receive $2 million.

b.) Katie should accept the settlement. She will receive $600,000.

c.) Katie should not accept the settlement and sue the company. She will receive $1.25 million.

d.) Katie should accept the settlement. She will receive $700,000.

e.) Katie should not accept the settlement and sue the company. She will receive $500,000.

f.) Cannot be determined.

g.) Katie should not accept the settlement and sue the company. She will receive $600,000.

h.) Katie should accept the settlement. She will receive $587,500.

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