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Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of
Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firms assets is $22,300. The standard deviation of the return on the firms assets is 42 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. |
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $38,000 that matures in one year. The current market value of the firms assets is $41,400. The standard deviation of the return on the firms assets is 42 percent per year. |
Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firms return on assets will have a standard deviation of 19 percent per year. |
a-1. | What is the combined value of equity in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
a-2. | What is the combined value of debt in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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