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?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter4: Estimating Demand

Section: Chapter Questions

Problem 1.4CE

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