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
A City has determined that building a new water distribution system using a new source of water would have an annual costs of $5,750,000 and annual net benefits of $4,250,000. The

Suppose an entrepreneur owns a firm that has a production technology that generates the following revenue: R(e) = e 2 +100e where revenue depends on his effort level e. The monetar

Instructions: Read the Herzberg findings related to extrinsic and intrinsic factors driving job satisfaction, dissatisfaction and motivation. To what extent should employers feel r

Dow Theory - Stock Exchange This theory depends upon profiting of prices of a chart of secondary movement. The principal objective is to discover whilst there is a change in t

Development of Plastic Money in Middle Asia Motive behind the Fast Development of This Finance (Plastic Money) In Middle Asia a) High incidences of fraud via dishonest empl

Write short notes on the following: a) Performance budgeting b) Zero base budgeting c) Factors affecting dividend decisions d) Accrual concept

Question: Unsatisfactory control of spare parts in a particular mechanical workshop is resulting in high carrying costs for some items and high stock-out costs for others. A st

(a) State the most appropriate drivers for the following direct expenses: (i) New business administration department's salary costs (ii) Medical examinations for temporary life

what is bank draft?How it can be prepared?

fdsdfasfdgcvdffasf