Question

Find a mutually profitable price for this acquisition, that is, a price such that, on average or in expectation, the owners of both the target and the private equity firm expect to profit. It helps to know that, when any outcome between a and b is equally likely, the expected or average outcome is a+b−a2 What is the lowest price the target's owners are willing to accept for the firm?

Answer 1

Answer:

The lowest price the target's owners are willing to accept for the firm is 50

Explanation:

Solution

It is known that in the market there are two firms. while one is target, the other is equity firm.

The target has several projects  at hand bu the firm's worth is uncertain. it lies anywhere between 0 and 100.

Now,

The equity believes that the target is not well managed and with a good management it's value can be increased by 50%

Now,

The owner of the target does not know the firm's worth. so, it may be profitable  or the firm to accept the average outcome

Note: Kindly find an attached copy of the complete question for this example below.

Average outcome  0 + 100/2

= 100/2 = 50

Therefore, the lowest price the target's owners are willing to accept for the firm is 50