In: Finance
Problem 22-24 Mergers and Equity as an Option
Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $23,000 that matures in one year. The current market value of the firm’s assets is $25,100. The standard deviation of the return on the firm’s assets is 24 percent per year and the annual risk-free rate is 6 percent per year, compounded continuously. |
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $48,000 that matures in one year. The current market value of the firm’s assets is $51,600. The standard deviation of the return on the firm’s assets is 38 percent per year. |
Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 18 percent per year. |
a-1. |
What is the combined value of equity in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
a-2. | What is the combined value of debt in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
b-1. | What is the value of the new firm’s equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
b-2. | What is the value of the new firm’s debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
c-1. | What was the gain or loss for shareholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
c-2. | What was the gain or loss for bondholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |