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

The inquiry concerns the business economics of setting an acquisition price where both the target firm and the acquiring private equity firm can expect to profit. The lowest acceptable price for the target firm would equate to a price point that surpasses average costs to include profit margins for the current owners. The concept of average profit is central to determining this equitable price point.

Step-by-step explanation:

The question posed is regarding finding a mutually profitable price for a firm acquisition scenario, which is a typical economic transaction in business economics. Specifically, the question seeks to determine the lowest price that the target firm's owners are willing to accept for their firm. This relates to the concept of average profit, which is calculated as the price minus the average cost. A key point to remember is that if the market price is higher than the average cost, the firm makes a profit, and if it is lower, the firm incurs losses.

To find the lowest acceptable price for the target's owners, we need to establish that this price will cover all their costs and allow for a profit margin that is suitable for them. The private equity firm, on the other hand, would want to buy at a price that ensures it too can make a profit after taking over the company. The expected, or average outcome, helps in determining such a price by looking at the middle point between the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.

Answer 2

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

Step-by-step 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