7. 19.

Mergers and equity as an option [LO 25.5] Suppose Sunburn Sunscreen and Frostbite Thermalwear in the previous problems have decided to merge. Because the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 21 per cent per year.

1. What is the combined value of equity in the two existing companies? Value of debt?

2. What is the value of the new firm’s equity? Value of debt?

3. What was the gain or loss for shareholders? For debtholders?

4. What happened to shareholder value here?