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
'The most significant function of any Central Bank is to undertake monetary control operations'.   Discuss with specific reference to the Bank of England, highlighting its current

Floatation of New Shares Rules for floatation of new shares The company must contain an issued share capital of at least Kshs.20 M. The company must contain c

Example of Sales Method The balance sheet of XYZ Ltd as on date 31st December 2002 is as following:          Net fixed asset Current assets   F

Role of Stock Exchange in Economic Development The Roles of Stock Exchange in Economic Development are as follow: 1. Raising Capital for Businesses The Stock Exchange

Jobbers or Speculators - Stock Market 1. This is a dealer who that trades in securities in his own right like a principal. 2. He can set prices and make active the market w

Application of Discriminant Analysis Application of Discriminant Analysis to the Selection of Applicants, Discriminative analysis is a statistical model such can be used to ac

Eye Field - Vertebrate Eye The development of eyes starts with evagination of the lateral wall of the forebrain. one on each side, which make the optic vesicles. By vital dye

Explain the Operations of Indian Stock Market. Meaning of Stock Exchange: Stock exchange means an organized market where securities issued by government organizations, compan

Interest Rate Levels and Stock Prices Interest rates contain two effects on corporate profits: a) Since interest rate is a cost, and like the higher the rate of interest the

Importance of Interest Rates These are of a specifically relevance to a finance manager since: i) They measure the cost of borrowing. ii) Interest rates in a country influen