A CFO wants to sell a security. The CFO knows the true value. She is willing to sell the security at a maximum discount of 15%. A potential investor does not know the true value but does know that the true value equals 100 with probability , equals 62 with probability or equals 38 with probability 1--. The investor is willing to pay at most the expected value of the security. (Note that 0, 1.)

[a] For which values of and will there be a transaction in all cases (so if the security is worth 38, 62 and 100)?

Suppose the market price of the security equals 60.

[b] Given this information, what is the probability that the security has the lowest value (of 38)?

The book states that asymmetric information is a larger problem if the issued security is equity rather than debt.

[c] What is the reason?