Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $30,000 that matures in one year. The current market value of the firms assets is $36,400. The standard deviation of the return on the firms assets is 53 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. Based on the BlackScholes model,

4. Suppose Sunburn Sunscreen and Frostbite Thermalwear in the previous problems have decided to merge. Because the two companies have seasonal sales, the combined firms return on assets will have a standard deviation of 29 percent per year.

a. What is the combined value of equity in the two existing companies? The value of debt?

b. What is the value of the new firms equity? The value of debt?

c. What was the gain or loss for shareholders? For bondholders?

d. What happened to shareholder value here?