In the Grumman-Northrop example described in the previous question, the combined firm did not take on additional debt after the acquisition. Assume that as a result of the merger the firm's optimal debt ratio increases to 20% of total capital from current levels. (At that level of debt, the combined firm will have an A rating, with an interest rate on its debt of 8%.) If it does not increase debt, the combined firm's rating will be A+ (with an interest rate of 7.75%).

a. Estimate the value of the combined firm if it stays at its existing debt ratio.

b. Estimate the value of the combined firm if it moves to its optimal debt ratio.

c. Who gains this additional value if the firm moves to the optimal debt ratio?