30.6 The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different towns. The end-of-period value of each firm is determined by the weather, as shown

The weather conditions in each town are independent of those in the other. Furthermore, each company has an outstanding debt claim of $200,000. Assume that no premiums are paid in the merger.

a. What is the distribution of joint values?

b. What is the distribution of end-of-period debt values and stock values after the merger?

c. Show that the value of the combined firm is the sum of the individual values.

d. Show that the bondholders are better off and the stockholders are worse off in the combined firm than they would have been if the firms remained separate.

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State Probability Value Rainy 0.1 $100,000 Warm 0.4 200,000 Hot 0.5 400,000