You are considering acquiring a firm rumored to have developed an effective gene

Question

You are considering acquiring a firm rumored to have developed an effective gene therapy for diabetes. The value of the firm depends on this therapy. If the therapy is effective, the firm is worth $100 per share; otherwise, the firm is worth no more than $20 per share. Your company's management and marketing strengths should increase the share price by at least 50 percent in either case. You must make an offer for the firm now, before the results of clinical trials are in. The current owner of the firm will sell for the right price. Make an offer for the firm. Explain why you think your offer makes sense.

Explanation / Answer

I assume that probability of Therapy to be effective = 0.5 and thus not effective = 0.5

So, the expected value of the Share if not purchased = 0.5*100 + 0.5*20 = 50 + 10 = 60

expected value of the Share if purchased by my company = 0.5*150 + 0.50*30 = 75 + 15 = 90

So I will make the offer to be between 60 to 90 pershare. I think my offer makes sense because I am offering the owner a price which is above the expected price in the future, So chances of him having more profits are from this offer than from retaining the company.

If you don't undrstand anything then comment, I'ill revert back on the same. :)

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