Determine the utility of the entrepreneur, Finance Basics

Suppose an entrepreneur owns a firm which has two production opportunities. Technology A generates an output (net profit) of 10 in state 1, an output of 20 in state 2, and an output of 90 in state 3. All states are equally likely. Technology B generates an output of 40, 50, and 60, respectively. Because of technological constraints, the entrepreneur can only implement one technology. The entrepreneur maximizes his expected utility.

(a) Which technology should the entrepreneur implement and what is the value of the firm?

(b) Suppose the firm has debt with face value 12 outstanding. What project does the entrepreneur implement?

(c) Suppose the firm has debt with face value 50 outstanding. What project does the entrepreneur implement?

(d) Determine the utility of the entrepreneur as a function of face value D for technology A and B, respectively.

(e) What is the maximal debt level such that the entrepreneur still chooses the (socially) efficient technology?

(f) Suppose the firm only has equity and 98% of shares are owned by retailed investors and the initial entrepreneur owns 2% of the firm. What technology does he implement?

Posted Date: 3/29/2013 5:15:39 AM | Location : United States







Related Discussions:- Determine the utility of the entrepreneur, Assignment Help, Ask Question on Determine the utility of the entrepreneur, Get Answer, Expert's Help, Determine the utility of the entrepreneur Discussions

Write discussion on Determine the utility of the entrepreneur
Your posts are moderated
Related Questions
Agency Theory An agency relationship arises whether one or more parties identified the principal contracts or hires another identified an agent to perform on his behalf some

Present Value Concept - Discounted Cash Flow Techniques This perception acknowledges the fact which a shilling losses value along with time and as that if it is to be compared

Basic EOQ Model The basic inventory decision model is Economic Order Quantity or called EOQ model. This model is specified via the following equation as: Whereas:Q is

Access the relevant authoritative literature on accounting for the transfer of financial assets. What conditions must be met for a transfer of receivables to be accounted for as a

what is bank draft?How it can be prepared?

Explain about the monetary role of banks. The Monetary Role of Banks: • A bank is a financial intermediary. • Bank reserves are the currency banks hold within their va

Question: Suppose that a security is presently selling for a price of $65, the nominal interest rate is 8%, and the security volatility is 0.15. a) Determine Delta of a Euro

FUNCTIONS OF BUDGET THAT MUST BE PRESENT IN THE MUNICIPAL FINANCIAL MANAGEMENT AND INDICATE HOW THESE FUNCTIONS CAN INFLUENCE MUNICIPAL FINANCIAL MANAGEMENT

Download a set of financial statements "Creative Technology Ltd" From that set of Financial Statements. IN YOUR OWN WORDS, understand what the main revenue  streams of the business

Acceptance Rule of IRR IRR will accept a venture if its IRR is higher than or equivalent to the minimum required rate of return such is usually the cost of finance also recogn