Question

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?​

Answer 1

Answer:

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

Explanation:

0