5. (10 points) Company A and Company B are considering a merger. The possible states of the economy and each company's value in that state are shown here:

State Boom Recession

Probability A 0.60 $320,000 0.40 $150,000

B $260,000 $100,000

Company A currently has a bond issue outstanding with a face value of $180,000. Company B is an all-equity company.

a. What are the values of each company's debt and equity before the merger? (4 points) b. What would be the value of the merged company? What would be the value of the

merged company's debt and equity? (3 points) c. Is there a transfer of wealth in this case? Why? (3 points)