Question

Total marks: 50, plus 10 bonus marks for an answer in PLAN/DO/REPORT format.

An Elevating Business. The annual global market for selling elevators is worth $40bn and the annual global market for maintaining them is also worth $40bn. Just 5 companies have 80% of the market for sales: Kone, Otis, Schindler, Thyssenkrupp and Hitachi, however they have only 40% of the market for maintenance since a large number of small companies maintain elevators even though they don’t sell them. Thyssenkrupp is one of the most innovative elevator suppliers, having recently developed technology that allows elevators to move sideways and well as up and down. Another major innovator is Kone that has recently developed extra strength cables which allow very long travel heights, suited to new buildings over 100 stories high in Asia and the Middle East.

Thyssenkrupp is considering selling its elevator division, to cover financial problems in other divisions of the company. You are a financial analyst, assessing the probability of Thyssenkrupp’s elevator division being sold and to whom and also assessing the revenues if it is sold. Based on your experience in the elevator business, you estimate the following probabilities.

The probability of global sales increasing by > 2% next year is 0.25; and the probability of global maintenance revenues increasing by > 2% next year is 0.2. If at least one of these markets increases by > 2% next year, Thyssenkrupp will not sell its elevator division.

If Thyssenkrupp does want to sell, it could plan on selling to: 

a private equity company with a probability of 0.35. This would bring a quick infusion of cash to Thyssenkrupp    to assist its other divisions, 

Kone, with a probability of 0.45, resulting in a very large and innovative company, 

Otis, Schindler or Hitachi with a probability of 0.2.

If Thysennkrupp wants to sell to Kone, the deal may be prevented by European regulators with a probability of 0.65, since it would result in a single very large European elevator company which could constitute a monopoly.
(a) (20) Draw a probability tree to represent the above situation.
(b) (5) Which method of probability assessment was used to estimate the above probabilities?
(c) (10) What is the probability Thyssenkrupp does actually sell its elevator division to Kone?
(d) (15) You estimate that if Kone buys Thyssenkrupp’s elevator division the revenues will be as follows:

	Mean ($bn)	Standard deviation ($bn)
Kone revenue from sales of new elevators	7.9	1.8
Kone revenue from maintenance contracts	3.7	0.6
Thyssenkrupp revenue from sales of new elevators	5.6	1.2
Thyssenkrupp revenue from maintenance contracts	2.1	0.3

What is your estimate of the mean and standard deviation of the total revenues of the combined company assuming that Kone buys Thyssenkrupp’s elevator division?

Answer 1