a You are a Chief Financial Officer CFOof a Boutique Fashion firm that is ready to enter the leather bags business. Despite the coronavirus pandemic, demand for fashion products seems to be rising and you believe that it is right today to enter the business. You also believe that exactly a year from now would also be a good opportunity because of the mass vaccination to contain the pandemic. It will cost you 35. 2 million to enter the market. You can construct a perfectly comparable company to mimic existing public to use the black-Scholes formula to decide when and if you should enter the leather bags business. Your analysis implies that the current value of an operating leather bags company is 40.4 million. However, the flow of customers is uncertain, and your analysis indicates a volatility of 25% per year. Twenty percent of the value of the company is attributable to the value of the free cash flows expected in the first year. If the one-year risk-free rate of interest is 4. 1%

i. Should the boutique Fashion firm enter this business and, if so when?

ii. How will the decision change if the current value of a leather bag company is 35.6 million instead of 40.4 million 40 marks

bAsymmetric information in markets arises where different market participants have different information. Using appropriate examples, discuss the implications of the following concepts :

i. adverse selection

ii. moral hazard

iii. winners curse