# You are a turnaround artist, specializing in identifying underperforming companies, buying them,…

You are a turnaround artist, specializing in identifying

underperforming companies, buying them, improving their performance and stock

price, and then selling them. You have found such a prospect, Sicco. This

company’s marketing department is mediocre; you believe that if you take over

the company, you will increase its value by 75% of whatever it was before. But

its accounting department is very good; it can conceal assets, liabilities, and

transactions to a point where the company’s true value is hard for outsiders to

identify. (But insiders know the truth perfectly.) You think that the company’s

value in the hands of its current management is somewhere between $10 million

and $110 million, uniformly distributed over this range. The current management

will sell the company to you if, and only if, your bid exceeds the true value

known to them.

(a) If you bid $110 million for the company, your bid

will surely succeed. Is your expected profit positive?

(b) If you bid $50 million for the company, what is the

probability that your bid succeeds? What is your expected profit if you do

succeed in buying the company? Therefore, at the point in time when you make

your bid of $50 million, what is your expected profit? (Warning: In calculating

this expectation, don’t forget the probability of your getting the company.)

(c) What should you bid if you want to maximize your

expected profit? (Hint: Assume it is X million dollars. Carry out the same

analysis as in part (b) above, and find an algebraic expression for your

expected profit as seen from the point in time when you are making your bid.

Then choose X to maximize this expression.)