Imagine you are the CEO of a battery manufacturer, Bluecorp. Your products are obtaining popularity in recent years, making Bluecorp one of the largest battery manufacturers in your country. This month, Bluecorp announced to provide an extremely lucrative severance package that is guaranteed to you in the event that the firm is taken over and you are let go. Before the announcement, the stock price for Bluecorp was $25 per share (8 marks).

(a) What is the terminology for this type of severance package? (1 mark)

(b) According to the research findings provided by our textbook, do you expect the stock price of Bluecorp to increase or decrease after the announcement? Explain the change of stock prices from the perspective of managerial incentives. (3 marks)

(c) Suppose a cellphone company, Redcorp, seeks to acquire your company. After Redcorp made the acquisition announcement, the stock price of Redcorp did not increase substantially. Explain this phenomenon using two reasons discussed in this unit. (4 marks)