Liedtke's advisors suggest that Texaco has more options in the face of Pennzoil's $5 billion counteroffer than simply to refuse or accept. In particular, they might counteroffer, probably with an amount near $4 billion.
Modify your analysis to take this new possibility into account. Assume that Pennzoil will either accept or refuse Texaco's counteroffer of $4 billion. If it refuses, the case will go to court and the same outcomes and probabilities apply as in the previous exercise. The probabilities that Texaco accepts, refuses, or counteroffers can be assumed to be 1/3.
a. Now what is the best decision for Liedtke, and what payoff can he expect to receive from it? Why does the expected value change in this case?
b. How sensitive is the overall expected value of this decision to the probability that Texaco counteroffers $4 billion? (Assume the probabilities of Texaco accepting or refusing are equal.) Construct a graph to relate the expected value of the decision to this probability.
c. How would your results change if you added a possible counteroffer of $3 billion?