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Question 3 (15 points) Both firms F and W have zero coupon 1-year bonds outstanding. They have the following characteristicst Suppose firms F and W
Question 3 (15 points) Both firms F and W have zero coupon 1-year bonds outstanding. They have the following characteristicst Suppose firms F and W decide to merge, but there is no synergy in the merger. The combined firm's return on assets will have a standard deviation of 62% per year. Assume the annual risk-free rate is 5% per year compounded continuously. a) Compute the value of equity of the combined firm. ( 8 points) b) Compute the value of debt of the combined firm. (3 points) c) Compare the aggregate equity value before and after the merger. Do you observe any change? Intuitively explain why such change occurs. (4 points)
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