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.(18) Firm A does well in a boom economy. Firm B does well in a bust economy. The probability of a boom is 50%. The
.(18) Firm A does well in a boom economy. Firm B does well in a bust economy. The probability of a boom is 50%. The end of period values of the two firms depend on the economy as shown below:- Economy Boom Bust Expected Value Probability .5 .5 Value of A $1,600 800 $1,200 Value of B $ 800 2,000 $1,400 firms have debt outstanding with a face value of $1,000. In order to diversify, the two firms have proposed a merger. The NPV of the merger is zero. Which of the following statements is correct? 4 (a) The stockholders are indifferent to merger since the NPV is zero. (b) The bondholders are indifferent to merger since the NPV is zero. (c) The bondholders stand to gain because the risk of the combined firm is less. 4 (d) The stockholders stand to gain because the probability of bankruptcy becomes zero after the merger
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