Consultant.com is a company that employs business professors as virtual consultants who supply answers to other companies' problems. Consultant.com wants to raise funds with a private equity issue. Unfortunately, because of fluctuations in the stock market, it is uncertain about the demand for its offering. It hopes to issue the stock at either $45 or $50. The demand is categorized into four possible scenarios. The following table shows demand for each scenario- price combination along with the beliefs regarding the probability of each possible state. Consultant.com must pay 10% of the generated funds to the investment bank that helped it identify potential investors. The company wants to maximize the funds raised.

What is the expected value of the stock offering if Consultant.com sets its price without knowing the future demand state? If Consultant.com can determine the future demand state by using a modified Dutch auction, what is its expected profit? If someone approached Consultant.com and told managers she could predict the future demand state, how much would that information be worth to them?

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Price/Share Stat State 2 State 3 State4 $45 $50 Probability 1.750 975 2,220 2.445 1,200 1.415 2,00 2,305 0.15 0.35 0.20 0.30