Can the lower bid be worth more?
Rank the bids on expected equity value.
The question
Bid A offers $108m cash and has an assumed 95% chance of closing. Bid B has $116m expected proceeds given close and a 75% chance of closing. Both bids cover the entire company. If either fails, target equity is worth $80m.
“Rank the bids on expected equity value.”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Choose your approach
What would you do here? Open the move you’d make.
Rank B first because $116m exceeds $108m.
Tempting, but it misses something. That comparison assumes both bids close. The expected-value edge is much smaller once closing risk enters.
Weight proceeds and fallback by their respective probabilities.
The strong move. If the deal fails, shareholders still own the business. The case values that equity at $80m.
See how a strong candidate says it
“A is $106.60m and B is $107.00m. B leads by $0.40m on these assumptions.”
Why it works: If the deal fails, shareholders still own the business. The case values that equity at $80m.
Step 2: Set the failure value
What would you do here? Open the move you’d make.
Assign the $80m fallback to the failure outcome.
The strong move. Use $80m as the equity shareholders retain if a sale fails.
Assume shareholders get zero if a sale fails.
Tempting, but it misses something. The holders still own the company if the sale fails.
See how a strong candidate says it
“Use $80m as the equity shareholders retain if a sale fails.”
Why it works: The holders still own the company if the sale fails.
Step 3: Weight both outcomes
What would you do here? Open the move you’d make.
Blend the expected closing proceeds and fallback equity.
The strong move. A gives $106.60m and B gives $107.00m after weighting each outcome.
Multiply the closing proceeds by the closing chance and stop.
Tempting, but it misses something. That drops the equity shareholders retain if the deal fails.
See how a strong candidate says it
“A gives $106.60m and B gives $107.00m after weighting each outcome.”
Why it works: That drops the equity shareholders retain if the deal fails.
Step 4: State the trade-off
What would you do here? Open the move you’d make.
Explain the narrow lead and check the seller’s priority.
The strong move. B leads by $0.40m on expected value. Ask how much the seller values the greater chance that A closes.
Promise that B gives shareholders a higher payout.
Tempting, but it misses something. Expected value averages possible outcomes.
See how a strong candidate says it
“B leads by $0.40m on expected value. Ask how much the seller values the greater chance that A closes.”
Why it works: Expected value averages possible outcomes.
The answer, in short
- Decision
- A is $106.60m and B is $107.00m. B leads by $0.40m on these assumptions.
- Because
- If the deal fails, shareholders still own the business. The case values that equity at $80m.
- What would change it
- At the same stock price, B ties A at about 73.89% closing probability.
Common traps
- Rank B first because $116m exceeds $108m.
Check your answer
- Did I state which values and assumptions I used?
- Set the failure value?
- Weight both outcomes?
- State the trade-off?
Last reviewed Nov 10, 2026