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Consultant.com is a company that employs business professors as virtual
consultants who supply answers to other companies’ problems. Consultant
.com wants to raise funds with a private equity issue. Unfortunately, because
of fluctuations in the stock market, it is uncertain about the demand for its
offering. It hopes to issue the stock at either $45 or $50. The demand is categorized
into four possible scenarios. The following table shows demand for each
scenario–price combination along with the beliefs regarding the probability of
each possible state. Consultant.com must pay 10% of the generated funds to
the investment bank that helped it identify potential investors. The company
wants to maximize the funds raised.

What is the expected value of the stock offering if Consultant.com sets its
price without knowing the future demand state? If Consultant.com can determine
the future demand state by using a modified Dutch auction, what is its
expected profit? If someone approached Consultant.com and told managers
she could predict the future demand state, how much would that information
be worth to them?
 

 
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