Question
You are asked to value a Merger and Acquisition deal using a Black-Schole model. Firm A and B plan to merge into Firm AB. Prior
You are asked to value a Merger and Acquisition deal using a Black-Schole model. Firm A and B plan to merge into Firm AB.
Prior to the merger, information for firm A and B are as follows:
Firm A: market value of firm's assets is 15 $billion; face value of firm's zero coupon bdebt is 7 $billion; standard deviation of firm's asset return is 35% .
Firm B: market value of firm's assets is 9 $billion; face value of firm's zero coupon bdebt is 3 $billion; standard deviation of firm's asset return is 45% .
The maturity of firm's zero coupon debt is 5 years.
Risk free rate is 3% .
After the merger, the standard deviation of firm's asset is reduced to 28% per year.
Use Black-schole model to find out the market value of equity after the two firms merged: ________ ($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)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started