Reference no: EM13907140
If an entrepreneur devotes all of her effort to a venture, it will be worth $1.25 million. If she devotes no effort to it, she can consume $1.25 million worth of other goods and activities. Suppose that as the sole owner, she prefers to devote enough effort to the venture to achieve a value of $1.0 million.
a) Now suppose that she desires to sell 40 percent of the equity to an outside investor, and that the investor purchases the equity based on its existing value of $1.0 million. However, with the entrepreneur’s reduced ownership, she would decide to devote less effort to the venture, so that its new value would be only $700,000. Analyze the wealth transfer between the investor and the entrepreneur.
b) Suppose the investor correctly anticipates that the entrepreneur will reduce effort once some of the equity is sold, and that with correct anticipation, the entrepreneur would devote enough effort to make the venture worth $800,000. How much should the investor pay? What does the entrepreneur end up with instead of the original $1.0 million of value in the venture and $250,000 of other consumption?
c) Suppose the entrepreneur is a workaholic, but that the investor does not know that she is. The investor believes she would reduce effort to the point where the venture is only worth $600,000. How might the parties use monitoring and bonding arrangements to change the deal? What can you say about how much they would be willing to spend on monitoring and bonding?
|
Defined benefit plan or contribution plan
: defined benefit plan or contribution plan
|
|
Partnerships and proprietorships can face difficulties
: Recall that we saw that partnerships and proprietorships can face difficulties when it comes to raising capital. Implication are that small businesses will generally face what problem? Why?
|
|
Investment contract that pays equal
: Peter Lynchpin wants to sell you an investment contract that pays equal $13,300 amounts at the end of each of the next 23 years. If you require an effective annual return of 8 percent on this investment, how much will you pay for the contract today?
|
|
Find the top cycle set for each alternatives in game
: Find the top cycle set, and for each alternative a in the set design a binary agenda for which a is the outcome of sophisticated voting.
|
|
If an entrepreneur devotes all of her effort to venture
: If an entrepreneur devotes all of her effort to a venture, it will be worth $1.25 million. If she devotes no effort to it, she can consume $1.25 million worth of other goods and activities. Suppose that as the sole owner, she prefers to devote enough..
|
|
What bid price should you set for the contract
: Your company has been approached to bid on a contract to sell 3,900 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. Additionally..
|
|
Prepare a factory overhead budget for november
: Fixed overhead equals $ 4,600,000 per month. Prepare a factory overhead budget for November.
|
|
What is a passive vs. active portfolio
: What is a passive vs. active portfolio? Describe what type of investors might be interested in each option and why.
|
|
Find the resale value of the equipment
: Naperville Corporation plans to buy a piece of construction equipment for $225,000 and depreciate it fully over 5 years using straight-line method of depreciation. However, it plans to use it for 8 years and then sell it for an unknown amount. The eq..
|