Suppose that in the model of Myers and Majluf (1984) the parameters take on the following values: λ = 0.60, H = 3, L = 2, I = 1.0, R = 1.25, r = 10 per cent. Use the above data and answer the following questions: (a) Does the model have a separating equilibrium, a pooling equilibrium, or both? (b) Based on your answer to question (a), what is the gain in wealth of the current shareholders of a firm that announces the issuing of new shares to finance the project of investment?
Suppose that in the model of Myers and Majluf (1984) the parameters take on the following values: λ = 0.60, H = 3, L = 2, I = 1.0, R = 1.25, r = 10 per cent. Use the above data and answer the following questions: (a) Does the model have a separating equilibrium, a pooling equilibrium, or both? (b) Based on your answer to question (a), what is the gain in wealth of the current shareholders of a firm that announces the issuing of new shares to finance the project of investment?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose that in the model of Myers and Majluf (1984) the parameters take on the following values:
λ = 0.60, H = 3, L = 2, I = 1.0, R = 1.25, r = 10 per cent.
Use the above data and answer the following questions:
(a) Does the model have a separating equilibrium, a pooling equilibrium, or both?
(b) Based on your answer to question (a), what is the gain in wealth of the current shareholders of a firm that
announces the issuing of new shares to finance the project of investment?
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