You are considering a merger of two companies:

Company A Company B

Value of Assets (MV) $ 10 Billion $ 100 Billion

Debt (MV) $ 5 Billion $ 10 Billion

Maturity of Debt 5 years 5 years

Volatility 35% 40%

Rf 2% 2%

If company B wants to buy Company As equity and pay off its debt as part of the merger,

(a) use the Black-Scholes model to analyze the market value of the equity and the debt of A and B before the merger

(b) If the two firms are merged and there is no synergy, and the combined firm has volatility of 32%, use the Black-Scholes model to analyze the market value of the equity and the debt of B of the combined firm

(c) does this merger makes sense for the stockholders of A and B? Explain