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Assume there are two types of rms: Good Firms and Lemons. Assume (unless otherwise indicated) that the two types of rms are equally probable, that

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Assume there are two types of rms: \"Good Firms\" and \"Lemons\". Assume (unless otherwise indicated) that the two types of rms are equally probable, that management knows the type of rm at time t = 0 but investors do not know the type of firm until time t = +1, and that management acts in the interests of \"OLD\" shareholders (those holding shares at the start of t: O). The firm has a perishable investment opportunity with a positive net present value (NPV), but the opportunity requires an investment I = 275. Since the rm has no \"nancial slack,\" it must issue stock (at t = 0) to raise the 275 if it is to undertake the project. Specically, \"NEW\" shareholders invest I = 275 in the rm by buying its stock at t = 0. Values for assets in place and the investment opportunity are given in the table: Good Firms 375 170 Assets-inplace Investment 0 ortunit (NPV) 1) Consider a m solution in which the rm issues stock at t = 0 and undertakes the project regardless of whether it is a Good Firm or a Lemon. a) In the trail, at t = 0, what value (P') is assigned to all rms? b) In the trial, at t = 0, what fraction of the rm is owned by old shareholders and by new shareholders? c) In the trial, at t = +1, the market discovers the true identity of all rms. What is VOLD and VNEW if the rm is a Good Firm? What is VOID and VNEW if the rm is a Lemon? d) Is the trial solution an equilibrium solution? That is, is it optimal for both Good Firms and Lemons to issue stock and invest in the project? If so, explain why. If not, what is the equilibrium solution? (Show all of your work.) e) Is there adverse selection? f) Is there a \"Lemons Premium\" in this example? If so, What is it

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