Question
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $20,000 face value that matures in one year. The current market value of the
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $20,000 face value that matures in one year. The current market value of the firm's assets is $21,600. The standard deviation of the return on the firm's assets is 34 percent per year. |
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $30,000 that matures in one year. The current market value of the firm's assets is $33,400. 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, and 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 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 firms 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 firms 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 | $ |
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