Lemon

income from
after
repurchase

Lemon
income from
after
repurchase

Question3ai
Assumption: Cash reserve is included return to manager and shareholder .Cash reserve is placed in bank
therefore incur interest. Therefore cash reserve in the next period has a payoff of 250,000 x 1.05 = 262,500
ProjectA
p(a)
0.25
0.25
0.5
Revenue
100,000,000
25,000,000
0
CashReserves
Debt
Left overcash

262,500
350,000
99,912,500

262,500
350,000
24,912,500

262,500
262,500
0

For manager to accept this contract E(M(h))>100,000

Expected Left overcash
100,000 <=h(31206250)
ANSWER: minimum h =
Question 3aii
ProjectB
p(a)
Revenue
CashReserves
Debt
Left overcash

31206250 <- 99,912,500 x 0.25 + 24,912,500 x 0.25 + 0 x 0.5

0.320448628079311%

<- 100000/31206250

0.4

0.15

0.45

100,000,000

25,000,000

262,500
350,000
99,912,500

262,500
350,000
24,912,500

262,500
262,500
0

For manager to accept this contract E(M(h))>100,000

Expected Left overcash
43701875 <- 99,912,500 x 0.4+ 24,912,500 x 0.15 + 0 x 0.45
100,000 <=h(43701875)
ANSWER minimum h=
0.228823134018849%
<- 100000/43701875
Question 3aiii

The shareholders will set minimum h of 0.228%.

The manager always prefer project B because for any h, the manager will get a
higher expected pay than if he chooses A.
This is the situation in which the shareholder gets the maximum expected pay-off.
For example, will not be set at 0.320 % because manager will choose B and
shareholder gets lower pay-off (99.68% of E(leftover) instead of 99.77% of
E(leftover).

Question3bi
Expected payoff to shareholder without the manager is 0.
The cash reserve is paid to debt holder as the firm does not have sufficient revenue to cover 350,000.
As a result, the firm goes bankrupt. This will be the case, unless covenant is in place.
Question3bii
ProjectA
p(a)
Revenue

0.25
100,000,000

0.25
25,000,000

0.5
0

CashReserves
Debt
Left overcash

262,500
350,000
99,912,500

262,500
350,000
24,912,500

262,500
262,500
0

ManagerPay-off
ShareholderPay-off

320,168
99,592,332

79,832
24,832,668

0
0

Expected Left overcash

ANSWER : Expected ShareholderPayoff
minimum h=

31,206,250

Question3biii
ProjectB
p(a)
Revenue
CashReserves
Debt
Left overcash

<- 31206250 -100000or

31,106,250
0.320448628079311%

0.4
100,000,000
262,500
350,000
99,912,500

ManagerPay-off
ShareholderPay-off

228,623
99,683,877

Expected Left overcash

ANSWER : Expected ShareholderPayoff
minimum h=

43,701,875

(1-h)31206250

0.15
25,000,000
262,500
350,000
24,912,500

0.45
0
262,500
262,500
0

57,006
24,855,494

<- 43701875 -100000or

43601875
0.228823134018849%

(1-h)43701875

0
0

Question3c
ProjectA
p(a)
Revenue

0.25
100,000,000

0.25
25,000,000

0.5
0

CashReserves
Left over for managerpay
Manager Pay-off (provided min h)

262,500
100,262,500
318,167

262,500
25,262,500
80,167

262,500
262,500
833

Debt
Left overcash

350,000
99,594,333

350,000
24,832,333

261,667
0

ShareholderPay-off

99,594,333

24,832,333

31,512,500
31,106,667

<-- (1006262500x 0.25) + (25262500 x 0.25)

+ (262500x0.5)

Expected Left over for manager

pay
Expected ShareholderPay-off
100,000 <=h(31512500)
minimum h=

If the manager was paid before debt was settled

0.317334391114637%

ProjectB
p(a)

0.4

0.15

0.45

Revenue

100,000,000

25,000,000

CashReserves
Left over for managerpay
Manager Pay-off (provided min h)
Debt
Left overcash

262,500
100,262,500
227,805
350,000
99,684,695

262,500
25,262,500
57,398
350,000
24,855,102

262,500
262,500
596
261,904
0

ShareholderPay-off

99,684,695

24,855,102

Expected Left over for manager

pay
Expected ShareholderPay-off
100,000 <=h(31512500)
minimum h=

44,012,500
43,602,143

<-- (1006262500 x 0.4) + (25262500 x 0.15)

+ (262500 x0.45)

0.227208179494462%

ANSWER
In summary:
1. when manager is paid AFTER debt ispaid
h(a)
h(b)
Shareholder payoff ProjectA
Shareholder payoff ProjectB
2. when manager is paid BEFORE debt is paid
h(a)
h(b)
Shareholder payoff ProjectA
Shareholder payoff ProjectB

0.320448628079311%
0.228823134018849%
31,106,250
43,601,875
0.317334391114637%
0.227208179494462%
31,106,667
43,602,143

When manager is paid before debt:

the shareholder payoff is lower
compared to the case if manager is
paid after debt. Manager share of
income is alsolower.

4a.
Raider if successful will be inefficient. This is because the value of the firm will reduce after
multinational firm take over. Even though incurs smaller value post-raid, raider will perform the
take-over to cannibalize market share for example.
ii. The bidders will not care about non-voting shareholders and derive offer price on shareholder with
voting rights only. Each party will submit an offer for voting shares only, winning bid attract all voting
shares. The bidder will pay at most the total security benefits (dividend) of holding the share +
private benefit.
Assumptions:
1. Controlling firm will only pay for voting share at a price in which the revenue they can potentially
receive by selling share is at least equal to the payment needed to purchase these share. Value of
firm is made up of = No. share in circulation x value per share. Revenue that raider will get
depends on pay-out policy of the firm.
Here I assume that post-successful raid incumbent (multinational) can offer 80 (72) per share
of security benefit as all is paid out into dividend.
2. In the non-voting sub-question, I will analyse the case for having 2,000,000 voting shares.
xi : security benefit per share
Zi : bidders i private benefit
nv: number of voting share
Presi : Reservation price for bidder i per share
i = multinational, incumbent
e is epsilon
Shareholder will tender up to value they get per share post-take over. The bidder will have
additional private benefit which is realized after raid is successful. Therefore it is accounted for
voting shareholder only.
Each party is willing to pay : xi nv + Zi
As a result Presi : xi + Zi /nv (1)
For incumbent management: if gained 1,000,000 voting shares and the current pay-out policy pay
equivalent amount of security benefit : 80 per share, they will earn 80,000,000 income if hold the
share.
Presincumbent : 80 + 0 /1M =80
For multinational: if gained 1,000,000 voting shares and the current pay-out policy pay equivalent
amount of security benefit: 72 per share, they will earn 72,000,000 income if hold the share
Presmultinational : 72 + 12M /1M =84
In this case, the answers to the following on questions will be:

Minimum winning price is the price of losing competing bidder : 80 + e . Raider will win as they can
offer higher price (up to 84) than incumbent.
If raid succeeds , ordinary shareholder who retained share gets 144m/2m = 72
If raid fails , ordinary shareholder who retained share gets 160m/2m = 80
Therefore any shareholder would prefer that the raid fails rather than succeeds. However if voting
shareholders are offered a price 80 + e, they will tender the share.
If there are no non-voting shares:
Presincumbent : 80 + 0 /2M =80

Presmultinational : 72 + 12M /2M =78

The answers to the following on questions will be:
Minimum winning price : 78 + e . Incumbent will win as they can offer higher price (up to 80) than
incumbent. Multinational does not have enough fund to support this.
If raid succeeds, ordinary shareholder who retained share gets 144m/2m = 72
If raid fails , ordinary shareholder who retained share gets 160m/2m = 80
This shows that private benefit gives greater weight in offering price for fewer voting share. My
example is in line with the fact that in order to get efficient take over, one-share-one-vote charter is
the optimal. More non-voting share-holders means that the raider can raid successfully with higher
probability. Therefore, this makes the voting shareholder worse off.
Different security benefit
However if we look at the case, where firm that take over successfully can change pay-out- policy to
0.
In this case, incumbent and multinational will earn 160,000,000 (144,000,000). Voting
shareholder security benefit if retained share is 160 and 144 for both raider respectively, this is
because non-voting shareholder will not get anything. Using the same argument as (1), maximum
price each will pay to gain control is Income / 1 000 000.
Presincumbent : 160
Presmultinational : 156
the answers to the following on questions will be:
Minimum winning price: 156 + e . Incumbent will win as they can offer higher price than
multinational.
If raid succeeds, ordinary shareholder who retained share gets per share value : 0
If raid fails, ordinary shareholder who retained share per share value: 0.
With no non-voting share, the answers will be the same as the case above! Presincumbent: 80
Presmultinational:78.

b.
For incumbent management (multinational): if gained 1,000,000 voting shares and the current payout policy pay equivalent amount of security benefit: 80 (120) per share
Presincumbent : 80 + 40.8M/1M = 120.8
Presmultinational : 120 + 2.4M/1M = 122.4
In this case, the answers to the following on questions will be:
In order to win raid, multinational has to be able to offer above current shareholder security benefit
and above the price of competing bidder. Minimum winning price: 120.8 + e . Multinational will win
as they can offer higher price than incumbent.
If raid succeeds, ordinary shareholder who retained share gets per share value: 120
If raid fails, ordinary shareholder who retained share per share value : 80.
This is the value-enhancing raid, therefore each shareholder prefers to retain their share. The voting
shareholder will appropriate benefit of raider up to the point where 120 is paid.