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I. Suppose the market has the following information: Tatler's Inc. is worth either $200m (the good state, with probability 0.8) or $100m (the bad state, with probability 0.2). Tatler's also has the right to invest in a new government project, which is likely to bring it an NPV of $30m. (in the good state) or $20m. (in the bad state). Tatler's management, however, knows exactly what state the company is in. The project requires an investment of $50m. but the firm can obtain this funding from a private investor to whom it can reveal its information credibly and without worrying that the information will be leaked to its competitors. 1. What will be the market value of the company? 2. It turns out now that the private investor is not available to invest in the deal and Tatler's must issue new equity to finance the project. Will Tatler's raise the outside equity and invest in the project, if the firm is actually in the good state? What if it is in the bad state? What will be the market value of the company? II. Suppose the market has the following information: Tatler's Inc. is worth either $200m (the good state, with probability 0.2) or $100m (the bad state, with probability 0.8). Tatler's also has the right to invest in a new government project, which is likely to bring it an NPV of $30m. (in the good state) or $20m. (in the bad state). Tatler's management, however, knows exactly what state the company is in. The project requires an investment of $50m. but the firm can obtain this funding from a private investor to whom it can reveal its information credibly and without worrying that the information will be leaked to its competitors. (This problem is exactly the same as the previous one, except the probabilities are reversed.) 1. What will be the market value of the company? 2. It turns out now that the private investor is not available to invest in the deal and Tatler's must issue new equity to finance the project. Will Tatler's raise the outside equity and invest in the project, if the firm is actually in the good state? What if it is in the bad state? What will be the market value of the company? 3. How is your answer to this question different from that of the previous question? I. Suppose the market has the following information: Tatler's Inc. is worth either $200m (the good state, with probability 0.8) or $100m (the bad state, with probability 0.2). Tatler's also has the right to invest in a new government project, which is likely to bring it an NPV of $30m. (in the good state) or $20m. (in the bad state). Tatler's management, however, knows exactly what state the company is in. The project requires an investment of $50m. but the firm can obtain this funding from a private investor to whom it can reveal its information credibly and without worrying that the information will be leaked to its competitors. 1. What will be the market value of the company? 2. It turns out now that the private investor is not available to invest in the deal and Tatler's must issue new equity to finance the project. Will Tatler's raise the outside equity and invest in the project, if the firm is actually in the good state? What if it is in the bad state? What will be the market value of the company? II. Suppose the market has the following information: Tatler's Inc. is worth either $200m (the good state, with probability 0.2) or $100m (the bad state, with probability 0.8). Tatler's also has the right to invest in a new government project, which is likely to bring it an NPV of $30m. (in the good state) or $20m. (in the bad state). Tatler's management, however, knows exactly what state the company is in. The project requires an investment of $50m. but the firm can obtain this funding from a private investor to whom it can reveal its information credibly and without worrying that the information will be leaked to its competitors. (This problem is exactly the same as the previous one, except the probabilities are reversed.) 1. What will be the market value of the company? 2. It turns out now that the private investor is not available to invest in the deal and Tatler's must issue new equity to finance the project. Will Tatler's raise the outside equity and invest in the project, if the firm is actually in the good state? What if it is in the bad state? What will be the market value of the company? 3. How is your answer to this question different from that of the previous

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