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Handout Problem 3 - Synergy Gains from Additional Debt Capacity In the Grumman-Northrop example, described in the previous example (Handout Problem 1), the combined firm
Handout Problem 3 - Synergy Gains from Additional Debt Capacity In the Grumman-Northrop example, described in the previous example (Handout Problem 1), the combined firm did not take on additional debt after the acquisition. Assume that, as a result of the merger, the firm's optimal debt ratio increases to 20% of total capital from current levels. (At that level of debt, the combined firm will have an A rating, with an interest rate on its debt of 9%.) If it does not increase debt, the combined firm's rating will be A+ (with an interest rate of 8.5%.) A. Estimate the value of the combined firm, if it moves to its optimal debt ratio. B. What's the additional value if the firm moves to the optimal debt ratio
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