Target Corp has a current share price of $30. Analysts forecast annual earnings of $2.50 per share for the foreseeable future and a cost of equity of 10%. There are rumours that Target may be taken over by a large retail company, which if true, would expect to increase the share price to $40.
What is the market’s current perception of the likelihood of the merger?
What should a market maker set her ask price at if she believes there is a 2% chance that she will face an informed trader?
How should she set her bid price?