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Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm's assets is $10,900. The standard deviation of the return on the firm's assets is 31 percent per year. |
Frostbite Thermalwear 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 firm's assets is $23,100. The standard deviation of the return on the firm's assets is 38 percent per year. |
Suppose Sunburn Sunscreen and Frostbite Thermal wear have decided to merge. Because the two companies have seasonal sales, the combined firms return on assets will have a standard deviation of 21 percent per year. The annual risk-free rate is 6 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 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.) |
b-1. | What is the value of the new firms equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
b-2. | What is the value of the new firms debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
c-1. | What was the gain or loss for shareholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
c-2. | What was the gain or loss for bondholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
\begin{tabular}{|l|} \hline a-1. Equity \\ \hline a-2. Debt \\ \hline b-1. Equity \\ \hline b-2. Debt \\ \hline c-1. Stockholder gain/loss \\ \hline c-2. Bondholder gain/loss \\ \hline \end{tabular}
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