Company A is considering acquiring Company T by means of a tender offer. A has to submit a bid by Sunday. The value of T depends directly on the outcome of a major oil exploration project it is currently undertaking. The result will be commonly known on Tuesday only. If the project succeeds, the company under current management will be worth $50/ share. But if the project fails, it will be worth $10/ share. Each of these events is equally likely.

If the project is a success, the company will be worth $60/ share under new management and otherwise it will be worth $15/ share under new management. A must make its share/ price offer on Sunday, before the outcome of the drilling project is known.

Company T would be happy to be acquired by A, provided it is at a profitable price. This is, T will accept any offer that is greater than the value of the company under current management. Suppose that Company T has to answer on Monday, before the results of the project are known. As Company A, how much should you bid?

1.30

2.Less than 30, but more than 15

3.37.5

4.15

5.10