Question

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Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $13,000 that matures in one year. The current market value of the firm's assets is $13,200. The standard deviation of the return on the firm's assets is 45 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $41,000 that matures in one year. The current market value of the firm's assets is $44,600. The standard deviation of the return on the firm's assets is 37 percent per year. Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm's return on assets will have a standard deviation of 19 percent per year. a-1. What is the combined value of equity in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) $2658.50 Equity a-2. What is the combined value of debt in the two existing companies? (Do not round intermediate calculations and round your answer to 32.16.) lecimal places, e.g., $ 10541.50 Debt b-1. What is the value of the new firm's equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Equity b- What is the value of the new firm's debt? (Do not round intermediate calcu lations 2. and round your answer to 2 decimal places, e.g., 32.16.) $ Debt c-1. What was the gain or loss for shareholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Gain/Loss c-2. What was the gain or loss for bondholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Ans-(a) Value of assets = 132001 Value ey Ardt = K 13,000 - Ruk fxe fetuar af: 4% compounded congrutie the BSM formula to calcolate firm's equity. we BS Á calwlator - usele - Spot price - 13200 stike pica - 13000_ - Volatilly - 45% | Reix free. Rate - 4% Days to Matuity - 360 :(El) Equily Value - Call Oplien pice 3658-50 -(A2) sett value (A) = firm value - El equily value. -(A2) L i s 13200 - 2658.50 = 105410 value of Apret est 44,600 4 face value of Delt (k) = 4,000 4 standard divation 37 percent Risk free (R 4 % uri financial calculator ((Black shole) Equity valle = (E27 - $ 9107.02 Deot value = 44600 9107.02 2 35,492.98 combined Equity value combined Aebt value 2658.50+ 9107.02 21765.52 10547.5+35492.98.246034.48

LBL face value of firm's Debt 13000 + 41000 2 34000 Market value of Asset - 13200+ 44600 = 578004 SAx4% I volatility - 19%. We financial calculator (Black shole) where = spot price 57800 Strike Price 54ooo باشه Vo۱ 19 : SA Time value of tquilý = 40% a 365 call price = 7759.734 (182) Value of new fim Desta 57800 - 7759,23 - 2 50040,27 X --
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