Firm A is considering taking over firm T. Firm A does not know firm T’s value,...

Firm A is considering taking over firm T. Firm A does not know firm T’s value, and believes that firm T’s value x is uniformly distributed on [0, 100]. Firm T will be worth 50% more under firm A’s management than it is under its own management. Suppose firm A offers y to take over firm T, and firm T is worth x under its own management. Then if T accepts A’s offer, A’s payoff is 3/2?−? and T’s payoff is y; if T rejects A’s offer, A’s payoff is 0 and T’s payoff is x.

(a) Find the Nash equilibrium of the game where A chooses how much to offer and T decides the lowest offer to accept.

(b) Explain the logic of adverse selection behind the equilibrium.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Which of the following statements does NOT reflect a price-taking firm? a. If the firm were...

Which of the following statements does NOT reflect a price-taking firm? a. If the firm were to charge more than the going price, it would sell none of its goods. b. The firm has no incentive to charge less than the going price. c. The firm can sell as much as it wants to sell at the going price. d. Consumers have a major impact on price, not firms.

A doctor wants to know if taking a cough drop really does make a difference in...

A doctor wants to know if taking a cough drop really does make a difference in the number of times someone coughs. He recruits 8 subjects, and for each subject he recorded the number of coughs in an hour, then had them take a cough drop. After taking the cough drop he again recorded the number of time the person coughs. Does take a cough drop result in a significant difference in number of coughs? Use α = .05. Subjects...

You are considering taking out a loan of $11,000.00 that will be paid back over 10...

You are considering taking out a loan of $11,000.00 that will be paid back over 10 years with quarterly payments. If the interest rate is 5.6% compounded quarterly, what would the unpaid balance be immediately after the thirteenth payment? The Unpaid balance would be $ (Round to 2 decimal places.)

You are considering taking out a loan of $7,000.00 that will be paid back over 10...

You are considering taking out a loan of $7,000.00 that will be paid back over 10 years with quarterly payments of $240.45. If the interest rate is 6.6% compounded quarterly, what would the unpaid balance be immediately after the eighth payment? The unpaid balance would be $_______. (Round to 2 decimal places.)

Suppose firm T’s utility function is: U(X,Y) = X0.4Y0.6. The firm has a budget of $100,...

Suppose firm T’s utility function is: U(X,Y) = X0.4Y0.6. The firm has a budget of $100, and the price of material Y is $20 and the price of X is $10. a) What is the optimal combination of inputs of X and Y for this firm? b) Suppose the price of Y and X are now $10 and $20, respectively. What effect will this have on the firm’s optimal input combination? c) Illustrate the answers to the preceding questions with...

AT&T’s reported Beta is .44 while Verizon’s Beta is .57. This means: AT&T is more volatile...

AT&T’s reported Beta is .44 while Verizon’s Beta is .57. This means: AT&T is more volatile than Verizon AT&T and Verizon are less volatile than the market overall. Verizon may be slightly more volatile than the overall market None of these If I bought 100 shares of Apple at $250 per share and sold them one year later at $310 per share, what is my total capital gain? $6,000 25% $60 None of these note:if you are not 100% sure...

Firm A is considering a merger with Firm B. The current market value of A is...

Firm A is considering a merger with Firm B. The current market value of A is $20,000,000 and the volatility of asset return is 58% percent. A also has a zero coupon bond with a face value of $8,000,000 that matures in 3 years. B’s market value is $9,000,000 with standard deviation of asset return of 70% and a zero coupon bond of $3,000,000 that matures in 3 years. The continuously compounded risk free rate is 4%. After the merger...

Consider a firm that currently has a market value of $2,000,000. The firm is considering a...

Consider a firm that currently has a market value of $2,000,000. The firm is considering a project with the following yearly cash flows and a required return (hurdle rate) of 12%. T=0 -1,500,000 T=1 400,000 T=2 -200,000 T=3 900,000 T=4 700,000 T=5 500,000 a) What is the NPV of the project? b) Calculate the Modified IRR (MIRR) using a 12% discount rate. c) If the firm decided to go forward with (i.e., accept) this project, what would the firm's new...

Firm A is considering a merger/acquisition with Firm B. Firm A: Market value of debt: $2...

Firm A is considering a merger/acquisition with Firm B. Firm A: Market value of debt: $2 million Market value of equity: $4 million Number of shares: 200,000 Firm B: Market value of debt: $5 million Market value of equity: $5 million Number of shares: 500,000 Investment rate for the combined firm (bA+B): 70% WACC for the combined firm (WACCA+B): 10% Total net operating income before synergy gain: (X): $3 million Synergy rate (a): 15% Corporate tax rate (T): 40% Growth...

Does the value of a firm necessarily increase if the earnings growth of the firm increases?

Subjects