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# 4 . Suppose firm A B is considering spinning off division B . There are no positive or negative synergies between division A and

#4. Suppose firm AB is considering spinning off division B. There are no positive or negative
synergies between division A and division B. Division B is in need of raising $20 million via
bond sale. If this $20 million is raised and invested in division B the cash flows of the divisions
are as follows: [For simplicity assume all cash flows are present values so there is no need to
discount the cash flows and the lender just needs to break even on average to extend a loan.]
(a) If firm AB does not conduct a spinoff, (i) what will be the interest rate on the bonds that are
issued by the firm (assume both divisions cash flows are available to repay the loans)?, and (ii)
what will be the total equity value of firm AB after the issue?
(b) If firm AB does conduct the spinoff, (i) what will be the interest rate on the bonds that are
issued by the independent firm B after the spinoff and (ii) what will be the total equity value of
firm A plus firm B after the independent firm B issues the bonds?
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