question 1

SOUTHERN ELECTRONICS, PARTI Steve Sheffler is president, CEO, and majority Yesterday Steve discussed this information with his stockholder of Southern Electronics, a small firm in the financial analyst, who is an expert regarding the town of Silicon Mountain. Steve faces a major decision: electronics industry and whose counsel Steve trusts Two firms, Big Red Business Machines and Banana completely. The analyst pointed out that Banana has an Computer, are bidding for Southern Electronics, incentive to be very optimistic about the EYF project. Steve founded Southern 15 years ago, and the "Being realistic, though," said the analyst, the company has been extremely successful in developing probability that the EYF succeeds is only 0.4, and if it progressive computer components. Steve is ready to sell does succeed, the expected price of the stock would be the company (as long as the price is right!) so that he only $40 per share. On the other hand, I agree with can pursue other interests. Last month, Big Red offered Banana's assessment for the share price if the EYF fails." Steve $5 million and 100,000 shares of Big Red stock Negotiations today have proceeded to the point (currently trading at $50 per share and not expected to where Banana has made a final offer to Steve of $5 change substantially in the future). Until yesterday, Big million and 150,000 shares of Banana stock. Red's offer sounded good to Steve, and he had planned The company's representative has stated quite clearly on accepting it this week. But a lawyer from Banana that Banana cannot pay any more than this in a Computer called last week and indicated that Banana straight transaction. Furthermore, the representative was interested in acquiring Southern Electronics. In claims, it is not clear why Steve will not accept the discussions this past week, Steve has leamed that offer because it appears to them to be more valuable Banana is developing a new computer, codenamed than the Big Red offer. EYF, that, if successful, will revolutionize the industry, Southern Electronics could play an important role in Questions the development of the machine. In their discussions, several important points have 1. In terms of expected value, what is the least that surfaced. First, Banana has said that it believes the Steve should accept from Banana? (This amount probability that the EYF will succeed is 0.6, and that if is called his reseruation price.) it does, the value of Banana's stock will increase from 2. Steve obviously has two choices, to accept the Big Red offer or to accept the Banana offer the current value of $30 per share. Although the future price is uncertain, Banana judges that conditional on Create and solve a complete decision tree the EYF's success, the expected price of the stock is $50 representing Steve's decision. per share. If the EYF is not successful, the price will 3. Why is it that Steve cannot accept the Banana probably decrease slightly. Banana judges that if the offer as it stands? EYF fails, Banana's share price will be between $20 4. How does Banana calculate the expected value of and $30, with an expected price of $25. its offer