The GoT travel agency is owned by Mr Brown, he has hired a manager, Dr Blue....

Transcribed Image Text:

The GoT travel agency is owned by Mr Brown, he has hired a manager, Dr Blue. He pays Dr Blue a wage w=600 francs. The firm's revenues are 500+1600log(E) where E is Dr Blue's effort per period. Dr Blue like to surf so spending long hours at the travel agency is not on her agenda. In fact her disutility for effort is 0.5E². 1. Dr Blue knows that if she puts in below 20 units a year Mr Brown will fire her. Given the contract they have, what does she do? 2. What is the discounted present value of the firm if it last 10 years and the interest rate is 5%? 3. Suppose Dr Blue is poor and comes to Mr Brown with an offer to buy him out in a leveraged buyout for 8,000 francs with a coupon rate of 6%. Should he accept the offer? Note to answer this question you must first find Dr Blue's effort level if she were the owner of the leverage firm, then you must find the firm's profit net of interest costs And then let Dr Blue deposit these profits in an interest bearing account so she can pay off the loan at the end. 4. Suppose however that Mr Brown does not want to sell the whole firm, at what price should he be willing to sell Dr Blue half the firm? Would doing so improve profits? 5. Going back to the beginning, if contracts were complete what could Mr Brown do? The GoT travel agency is owned by Mr Brown, he has hired a manager, Dr Blue. He pays Dr Blue a wage w=600 francs. The firm's revenues are 500+1600log(E) where E is Dr Blue's effort per period. Dr Blue like to surf so spending long hours at the travel agency is not on her agenda. In fact her disutility for effort is 0.5E². 1. Dr Blue knows that if she puts in below 20 units a year Mr Brown will fire her. Given the contract they have, what does she do? 2. What is the discounted present value of the firm if it last 10 years and the interest rate is 5%? 3. Suppose Dr Blue is poor and comes to Mr Brown with an offer to buy him out in a leveraged buyout for 8,000 francs with a coupon rate of 6%. Should he accept the offer? Note to answer this question you must first find Dr Blue's effort level if she were the owner of the leverage firm, then you must find the firm's profit net of interest costs And then let Dr Blue deposit these profits in an interest bearing account so she can pay off the loan at the end. 4. Suppose however that Mr Brown does not want to sell the whole firm, at what price should he be willing to sell Dr Blue half the firm? Would doing so improve profits? 5. Going back to the beginning, if contracts were complete what could Mr Brown do?

Answer rating: 100% (QA)

Lets break down each question 1 Dr Blues Optimal Effort Level Dr Blue aims to maximize her utility which is the difference between revenue and disutility She wants to maximize UE 500 1600logE 05E2 To ... View the full answer