Firm X has equity worth 20M and debt worth 10M. The firm has an equity beta of 2, and its debt is risk free. 

 

            Firm Y is all-equity financed. The value of that firm is 10M. Firm Y has an equity beta of 1.

 

            Firms X and Y merge and change their name to "Firm Z". The merged firm assumes all of the assets of firms X and Y as well as firm X's debt. After the merger, this debt continues to be risk free and worth 10M.

 

            Assume a perfect Modigliani-Miller world with no taxes. Also, the merger involves no synergy gains (i.e., the value of the assets is unchanged by the merger).

 

            Compute:

 

            a) The value of firm Z's assets.

            b) The value of firm Z's equity.

            c) Firm Z's asset beta. 

            d) Firm Z's equity beta.