The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different towns. The end-of-period value of each firm is determined by the weather, as shown below. There will be no synergy to the merger. State Probability Value Cold 0.5 250,000 Hot 0.5 900,000 The weather conditions in each town are independent of those in the other. Furthermore, each company has an outstanding debt with face value of $450,000. Assume that no premiums are paid in the merger. What is the value of debt of the Chocolate Ice Cream Company as a standalone company? What is the value of equity of the Chocolate Ice Cream Company as a standalone company? What is the value of the combined firm? What is the value of debt of the combined firm after the merger? What is the value of equity of the combined firm after the merger? Which of the following statement is NOT true? Bondholders are better off in the combined firm. Shareholders are indifferent about the merger. The combined firm has lower probability of default. Bondholders benefit from diversification in the combined firm.
The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different towns. The end-of-period value of each firm is determined by the weather, as shown below. There will be no synergy to the merger. State Probability Value Cold 0.5 250,000 Hot 0.5 900,000 The weather conditions in each town are independent of those in the other. Furthermore, each company has an outstanding debt with face value of $450,000. Assume that no premiums are paid in the merger. What is the value of debt of the Chocolate Ice Cream Company as a standalone company? What is the value of equity of the Chocolate Ice Cream Company as a standalone company? What is the value of the combined firm? What is the value of debt of the combined firm after the merger? What is the value of equity of the combined firm after the merger? Which of the following statement is NOT true? Bondholders are better off in the combined firm. Shareholders are indifferent about the merger. The combined firm has lower probability of default. Bondholders benefit from diversification in the combined firm.
Chapter13: Comparative Forms Of Doing Business
Section: Chapter Questions
Problem 10DQ
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- The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different towns. The end-of-period value of each firm is determined by the weather, as shown below. There will be no synergy to the merger.
State |
Probability |
Value |
Cold |
0.5 |
250,000 |
Hot |
0.5 |
900,000 |
The weather conditions in each town are independent of those in the other. Furthermore, each company has an outstanding debt with face value of $450,000. Assume that no premiums are paid in the merger.
- What is the value of debt of the Chocolate Ice Cream Company as a standalone company?
- What is the value of equity of the Chocolate Ice Cream Company as a standalone company?
- What is the value of the combined firm?
- What is the value of debt of the combined firm after the merger?
- What is the value of equity of the combined firm after the merger?
- Which of the following statement is NOT true?
Bondholders are better off in the combined firm.
Shareholders are indifferent about the merger.
The combined firm has lower probability of default.
Bondholders benefit from diversification in the combined firm.
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Step 1: 1. Value of Debt of Chocolate Ice Cream Company as a standalone company:
VIEWStep 2: 2. Value of Equity of Chocolate Ice Cream Company as a standalone company:
VIEWStep 3: 3. Value of the Combined Firm:
VIEWStep 4: 4. Value of Debt of the Combined Firm after the merger:
VIEWStep 5: 5. Value of Equity of the Combined Firm after the merger:
VIEWStep 6: 6. Determine which statement is NOT true:
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