Consider a conglomerate, non-synergistic, merger between two firms ABC and XYZ. In a purely conglomerate merger, the post-merger firm value is the sum of the two pre-merger values because there is no synergy.

ABC has a total current market value of $6 billion. ABC's capital structure is composed of common stock and a 5-year zero-coupon debt with a face value of $2.5 billion, and its Black-Scholes volatility () is 35% based on the firm as a whole.

XYZ has a total current market value of $5 billion and a 5-year zero-coupon debt with face value of $ 3 billion and Black-Scholes () volatility of 45%. The risk-free rate is 5%.

(a)What are the current market values of debt and equity in ABC and XYZ?