Question
Two firms X and Y will merge. You are asked to value the market value of the equity of merged firm using Black-Schole model. Prior
Two firms X and Y will merge. You are asked to value the market value of the equity of merged firm using Black-Schole model.
Prior to the merger, information for firm A and B are as follows:
Firm X: market value of firm's assets is 25 $billion; face value of firm's zero coupon bdebt is 10 $billion; standard deviation of firm's asset return is 40% .
FirmY: market value of firm's assets is 15 $billion; face value of firm's zero coupon bdebt is 3 $billion; standard deviation of firm's asset return is 48% .
The maturity of firm's zero coupon debt is 4 years.
Risk free rate is 5% .
After the merger, the standard deviation of firm's asset is reduced to 32% per year.
Use Black-schole model to find out the market value of equity after the two firms merged: ________ ($billion)
(Please DO NOT round your intermediate steps, and format and round your FINAL answer to billion of dollars with ONE decimal place: for example, 12.3 only)
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