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finance assignment

 
 
Reply Wed 9 Nov, 2016 12:52 pm
Hey all, i have some serious problems with this finance question I just can not wrap my head around. Could you please help me, the question is as follows:

A CFO wants to sell a security. The CFO knows the true value. She is willing to sell the security at a maximum discount of 15%. A potential investor does not know the true value but does know that the true value equals 100 with probability μ, equals 62 with probability λ or equals 38 with probability 1-μ-λ. The investor is willing to pay at most the expected value of the security. (Note that 0≤μ, λ≤1.)
[
a] For which values of μ and λ will there be a transaction in all cases (so if the security is worth 38, 62 and 100)?

Suppose the market price of the security equals 60.

Given this information, what is the probability that the security has the lowest
value (of 38)?
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cicerone imposter
 
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Reply Wed 16 Nov, 2016 04:43 pm
@jack2112,
Silly question. Nobody knows the future value of any security without the proper financial information, and understanding the demand for the product and/or services.
That's the reason why Economics is not science; there's no mathematical formula that will predict how any economy will do in the future. That applies to any company within that economy. There are too many factors into the economy that's always in flux that can't be measured.

You say the CFO knows the "true value." That's static, history, the past. There's no way to predict the future. What counts more than anything else in any company is its management, and their ability to see the product and/or services that will remain in high demand. That means updating their products and services that will continue to have high demand. In today's world, Apple is a good example. In the past, many big, thriving companies have gone bankrupt, because they didn't have the right kind of management skills.

Most investments in securities are guesses; nothing else.

Quote:
These companies were once the top in their field, but fell to the point where filing bankruptcy was their best option.
Kodak. We're barely into 2012 and a major company has already filed for bankruptcy. ...
Enron. ...
Blockbuster. ...
Schwinn Bicycle Company. ...
General Motors. ...
Marvel Entertainment. ...
Hugo Boss. ...
Atkins Nutritionals.
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