Consider the following two companies, Acquisitive Corp (AC) and Target Corp (TC). The relevant information to undertake an option-based valuation of their equity is provided below:

AC (TC) has a market value of assets of $20 million ($10 million). AC (TC) has debt of repayment value of $6 million ($4 million) maturing in 10 years. The standard deviation of asset returns of AC (TC) is 60% (70%). The risk free rate is 2.50%.

AC and TC are proposing to merge to form the ATC Corp. There are some synergies to the merger and as a result of these synergies the market value of the combined firm is $32 million. Further, the risk of the firm is substantially reduced to a standard deviation of assets returns of 25%.

17) Which of the following statements is true about the proposed merger?

A) The synergies in the proposed merger are positive and therefore the merger should be undertaken.

B) The synergies in the proposed merger are positive and accrue to the stockholders and therefore the merger should be undertaken.

C) The synergies in the proposed merger accrue mainly to the debt holders and from a shareholder value perspective this merger should not be undertaken.

D) The merger should not be undertaken because it is overall value-destructive.

E) None of the above