Smith and Jones are the only two partners in a consultancy company. There is an "exit clause" in their partnership contract. If either of the partners is unhappy at any time in the partnership, this partner can use this "exit clause" and dissolve the partnership. The "exit clause" is as follows: 

"If partner A is unhappy, partner A will name a price. Next, the other partner has a choice of buying (getting sole ownership of the company by paying this price to partner A) or selling (receiving this price from partner A who becomes the sole owner) the company at that price". When a buyer pays a price p for the company he values (present discounted value) at v, assume that the buyer's utility is v-p while the seller's utility is p.

a. Suppose that each partner values the company at 100 monetary units (in terms of net present discounted value) and this is mutual knowledge.

Jones now wants to dissolve the partnership by quoting a price. What price should he quote?

b. Instead, suppose that Jones values the company at 100 while Smith values the company at 60 monetary units and this is mutual knowledge.

Jones now wants to dissolve the partnership by quoting a price. What price should he quote? Does the partner who values the firm higher get the firm?

c. Suppose that the values are just as in b) but it is Smith who wants to dissolve the partnership by quoting a price. What price should he quote? Does the partner who values the firm higher get the firm?

Answer rating: 100% (QA)

a In this scenario both partners value the company at 100 monetary units Since Jones wants to dissolve the partnership he can quote a price that is eq... View the full answer