The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and...
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 | ||||
| Rainy | .1 | $ | 280,000 | |||
| Warm | .4 | 460,000 | ||||
| Hot | .5 | 920,000 | ||||
The weather conditions in each town are independent of those in
the other. Furthermore, each company has an outstanding debt claim
of $460,000. Assume that no premiums are paid in the merger.
a. What are the possible values of the combined company?
(Do not round intermediate
calculations.)
| Possible states | Joint Value | ||
| Rain-Rain | $ | ||
| Rain-Warm | |||
| Rain-Hot | |||
| Warm-Warm | |||
| Warm-Hot | |||
| Hot-Hot | |||
b. What are the possible values of
end-of-period debt and stock after the merger? (Leave no
cells blank - be certain to enter "0" wherever required. Do not
round intermediate calculations.)
| Debt Value | Stock Value | ||||
| Rain-Rain | $ | $ | |||
| Rain-Warm | |||||
| Rain-Hot | |||||
| Warm-Warm | |||||
| Warm-Hot | |||||
| Hot-Hot | |||||
c. How much do stockholders and bondholders
each gain or lose if the merger is undertaken? (A negative
answer should be indicated by a minus sign. Do not round
intermediate calculations.)
| Bondholder gain/loss | $ | ||
| Stockholder gain/loss | $ | ||
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The Chocolate Ice Cream Company and the Vanilla Ice Cream
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production kit (pasteurizer/homogenizer, cooler, aging vat,
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