8.10. Steady Corp. has a share value of $50. At-themoney American call options on Steady Corp. with nine months to expiration are trading at $3. Sure Corp. also has a share value of $50. At-the-money American call options on Sure Corp. with nine months to expiration are trading at $3. Suddenly, a merger is announced. Each share in both corporations is exchanged for one share in the combined corporation, “Sure and Steady.” After the merger, options formerly on one share of either Sure Corp. or Steady Corp. were converted to options on one share of Sure and Steady. The only change is the difference in the underlying asset.

Analyze the likely impact of the merger on the values of the two options before and after the merger. Extend this analysis to the effect of mergers on the equity of firms with debt financing.