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Attention Industries has two divisions. Division 1 makes cleaning products and the net worth of this division ( present value of cash flows ) is
Attention Industries has two divisions. Division makes cleaning products and the net worth of this division present value of cash flows is $ Division makes a chemical product. The net worth of division is $ absent any potential liability. There is a chance that division could have $ liability for pollution damage. The potential victims have no contractual relationship with the firm. The probability of such a loss is where s is the amount the firm spends on safety. The firm must choose the level of sNote that the derivative of with respect to s is equal to i First, calculate the total value of the firm, including both divisions at the same time, as an equation of s Second, take derivative with respect to s to find the s that maximizes the total value. Third, plug in the value of s you found into total value equation to find the maximum total value. marks ii Division is riskless and has a standalone value of $ Since all the risk comes from division we must consider the chosen level of safety s of this unit as a standalone entity. First, calculate the standalone value of division as an equation of s Second, take derivative with respect to s to find the s that maximizes the standalone value of division Third, plug in the value of s you found into the equation of standalone value of division to find the maximum standalone value of division marksHint: the value of division is $if no liability arises. However, if a loss of $ occurs it cannot pay more than the original $ standalone value due to limited liability. iii What is the maximum value of the firm if we treat division as a separate entity? Note that we are splitting the two divisions assuming that separated division as a standalone firm is protected by limited liability. Hint: Add your answer to part ii to the net worth of division marks iv Is there a gain from splitting the firm up Calculate the numerical value of gainloss marksHint: It is the difference between the maximum total value without split up that you found in i and the maximum total value with split up that you found in iii
Attention Industries has two divisions. Division makes cleaning products and the net worth of this
division present value of cash flows is $ Division makes a chemical product. The net worth of
division is $ absent any potential liability. There is a chance that division could have $
liability for pollution damage. The potential victims have no contractual relationship with the firm. The
probability of such a loss is
where s is the amount the firm spends on safety. The firm must
choose the level of sNote that the derivative of
with respect to s is equal to
i First, calculate the total value of the firm, including both divisions at the same time, as an
equation of s Second, take derivative with respect to s to find the s that maximizes the
total value. Third, plug in the value of s you found into total value equation to find the
maximum total value. marks
ii Division is riskless and has a standalone value of $ Since all the risk comes from
division we must consider the chosen level of safety s of this unit as a standalone entity.
First, calculate the standalone value of division as an equation of s Second, take
derivative with respect to s to find the s that maximizes the standalone value of division
Third, plug in the value of s you found into the equation of standalone value of division
to find the maximum standalone value of division marksHint: the value of division
is $if no liability arises. However, if a loss of $ occurs it cannot pay more than
the original $ standalone value due to limited liability.
iii What is the maximum value of the firm if we treat division as a separate entity? Note that
we are splitting the two divisions assuming that separated division as a standalone firm is
protected by limited liability. Hint: Add your answer to part ii to the net worth of division
marks
iv Is there a gain from splitting the firm up Calculate the numerical value of gainloss
marksHint: It is the difference between the maximum total value without split up that you
found in i and the maximum total value with split up that you found in iii
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