Suppose Sunburn Sunscreen (Problem 18) and Frostbite Thermalwear (Problem 20) have decided to merge. Since the two

Question:

Suppose Sunburn Sunscreen (Problem 18) and Frostbite Thermalwear (Problem 20) have decided to merge. Since the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 16 percent per year.
a. What is the combined value of equity in the two existing companies? Value of debt?
b. What is the value of the new firm’s equity? Value of debt?

c. What was the gain or loss for shareholders? For bondholders?
d. What happened to shareholder value here?

In the previous problem 18

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firm’s assets is $16,100. The standard deviation of the return on the firm’s assets is 32 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously.

In the previous problem 20

Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $22,000 that matures in one year. The current market value of the firm’s assets is $23,200. The standard deviation of the return on the firm’s assets is 34 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...