Firm A seeks to acquire (privately owned) firm T whose ultimate dollar value is uncertain because of its possible liability for the past production of hazardous waste. The table shows A€™s and T€™s respective values (in $ millions) for the firm conditional on whether the firm is found to be liable. Note that A and T have different contingent values and different probability assessments (shown in parentheses) as to T€™s liability. Both firms are risk neutral.

a. Firm A is hoping to acquire T in a 100 percent cash transaction. Is a mutually beneficial 100 percent cash transaction possible? Explain.
b. Instead, suppose that firm A considers acquiring T, paying all or in part with its own stock. (The owners of T are prohibited from selling the stock they receive for two years.) If A acquires T and subsequently T is found liable, both sides expect that A€™s stock price will fall by 50 percent. Is a mutually beneficial 100 percent stock transaction possible?
(Provide an example to show whether the answer is yes or no.)
c. The firms are considering a provision in the acquisition allowing T€™s senior managers (who will continue to work for the combined firm) to buy back (at a predetermined price) ownership of T in the event that the firm is found liable. Does such a provision make sense? Provide a qualitativeexplanation.

Value of Firm T T Not Liable 50 (.5) 40 (.8) T Liable 20 (.5) 30 (2) A's Value T's Value