lab2f07key - AEM 417 Fall 2007 Answers Lab 2 Southern...

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AEM 417 Fall 2007 Answers – Lab 2 Southern Electronics Case Tree: Use the tree to assess the expected money value of Banana's offer from their point of view. a. Banana's view of EMV of offer = $11 million b. Why did Banana see its offer as more valuable than Steve did? More than $10 M, which is value of Big Red’s offer c. What is the cost of Banana's offer? Consider: -fixed cost: $5 M -value of stock (note: use CURRENT stock price of $30): 150,000 x $30 = $4.5 M
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II. Southern Electronics Case - Part 2: Steve is well aware of the difference between his probabilities and Banana's, and he realizes that because of this difference, it may be possible to design a contract that benefits both parties. In particular, he is thinking about put options for the stock. Steve reasons that if he could get Banana to include a put option on the stock with an exercise price of $30, then he would be protected if the EYF failed. Steve proposes the following deal. He will sell Southern Electronics to Banana
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