Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $14,000 face value that matures in one year. The current market value of the

image text in transcribed

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $14,000 face value that matures in one year. The current market value of the firm's assets is $15,300. The standard deviation of the return on the firm's assets is 44 percent per year. Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $40,000 that matures in one year. The current market value of the firm's assets is $43,600. The standard deviation of the return on the firm's assets is 38 percent per year. Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm's return on assets will have a standard deviation of 19 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. a-1 What is the combined value of equity in the two existing companies ? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Equity $ a-2 What is the combined value of debt in the two existing companies? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Debt $ b-1 What is the value of the new firm's equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Equity $ b-2 What is the value of the new firm's debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Debt $ C-1 What was the gain or loss for shareholders? (Loss amount should be indicated by a minus sign.Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Gain/Loss $ C-2 What was the gain or loss for bondholders? (Loss amount should be indicated by a minus sign.Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Gain/Loss $

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investments An Introduction

Authors: Herbert B Mayo

10th Edition

0538452099, 9780538452090

More Books

Students also viewed these Finance questions

Question

What is one of the skills required for independent learning?Explain

Answered: 1 week ago

Question

Appreciate the rationale for having a human resources department.

Answered: 1 week ago

Question

What are some global employee and labor relations problems?

Answered: 1 week ago