Question

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 Rainy Warm Hot Probability Value 1 270,000 450,000 905,000 4 5 The weather conditions in each town are independent of those in the other. Furthermore, each company has an outstanding debt claim of $450,000. Assume that no premiums are paid in the merger. a. What are the possible values of the combined company? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Possible states Joint Value $ 540000 Rain-Rain Rain-Warm 720000 1175000 Rain-Hot 900000 Warm-Warm 1355000 Warm-Hot Hot-Hot 1810000 b. What are the possible values of end-of-period debt values and stock values after the merger? (Leave no cells blank be certain to enter "O" wherever required. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Stock Value Debt Value $ 540000 Rain-Rain Rain-Warm 720000 900000 Rain-Hot 275000 900000 Warm-Warm 900000 Warm-Hot 455000 910000 Hot-Hot 900000 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 and round your answers to the nearest whole number, e.g., 32.) $ 18,000 Bondholder gain/loss Stockholder gain/loss

Answer 1

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Home ert Page Layout Formulas Data Review V Add-Ins Cut Σ AutoSum , Calibri General aCopy Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛 Paste Conditional Format C Insert Delete Format Sort &Find & Format Painter Formatting as Table Styles2Clear Filter Select Clipboard Font Styles dting Alignment GT186 GT HA GU GV GW GX GY GZ HB HC HD 186 187 OINT PROBABILITIES 0.1 x 0.1 RAIN- WARM & WARM-RAIN ARE SAME 188 RAIN -RAIN 0.01 189 RAIN-WARM 0.1 X 0.4 RAIN-HOT AND HOT-RAIN ARE SAME 0.04 190 RAIN HOT 0.1 X 0.5 0.05 HOT-WARM AND WARM-HOT ARE SAME 191 0.4 X0.1 SO THEY WILL BE ADDED WARM RAIN 0.04 192 WARM-WARM 0.4 X0.4 0.16 193 WARM-HOT 0.4 X0.5 0.5 X0.1 194 HOT-RAIN 0.05 195 HOT-WARM 0.5 X 0.4 0.25 196 HOT-HOT 0.5 X 0.5 197 198 POSSIBLE STATES JOINT PROBABILITIES 199 RAIN -RAIN 0.01 RAIN -WARM 200 0.08 201 RAIN HOT 202 WARM-WARM 0.16 203 WARM-HOT 204 0.25 HOT-HOT | deberk . MARGIN MONEY tax . PB ROPL APV ROSS EVA MVA GED BUY SWAP- distress BRIGHAN- CAP GAIN Sheet1 Sheet2 Sheet3 Sel d press ENTER or choose Paste 20:19 a驅14 ! @m*6ENG 21-05-2019

Home ert Page Layout Formulas Data Review V Add-Ins Cut Σ AutoSum , aCopy Format Painter Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Sort &Find & 袖 2 Clear , Formatting ▼ as Table-styles ▼ Filter Select ▼ ▼ ▼ Clipboard Font dting Alignment HB210 GT GU GV GW GX GY GZ HA HC HD 206 OINT VALUES 207 a POSSIBLE STATES 208 RAIN -RAIN 270000 270000 540000 209 RAIN -WARM 270000+450000 720000 210 RAIN HOT 270000 +905000 1175000 211 WARM-WARM 450000+450000 212 WARM-HOT 450000+905000 1355000 213 HOT-HOT 905000+905000 1810000 214 OINT VALUES DEBT VALUE 215 b POSSIBLE STATES JOINT PROBABILITIES EQUITY VALUE 216 RAIN -RAIN 0.01 540000 540000 0 217 RAIN -WARM 0.08 720000 720000 0 275000 218 RAIN HOT 1175000 900000 219 WARM-WARM 0.16 0 220 WARM-HOT 0.4 1355000 900000 455000 221 HOT-HOT 1810000 910000 0.25 223 EACH COMPANY HAS A DEBT OF 450000 AND TILL AMOUNT OF 900000 IS NOT PAID, EQUITY HOLDERS WILL NOT GET ANYTHING 224 4deberkMARGIN MONEY tax . PB ROPL APV ROSS EVA MVA GED BUY SWAP- distress BRIGHAN- CAP GAIN Sheet1 Sheet2 Sheet3 erences: AL125 齞"z a 옐9L ! @a; ENIG 21-05-2019

Home ert Page Layout Formulas Data Review V Add-Ins Σ AutoSum , aCopy ClrSort& Find & Filter Select В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Format Painter B 1 袖 2 Clear , Formatting ▼ as Table-styles ▼ ▼ ▼ ▼ Clipboard Font Cells dting HC226 GV GT GU GY GZ HA HB 226 BEFORE MERGER, DEBT VALUE OF INDIVIDUAL COMPANY IS 227 PROB DEBT VALUE PROB DEBT VALUE RAIN 228 0.1 270000 27000 229 0.4 450000 180000 WARM 230 0.5 450000 225000 231 432000 232 THE TOTAL DEBT VALUE OF BOTH COMPANIES BEFORE MERGER 432000 +432000- 233 TOTAL DEBT VALUE POST MERGER 234 DEBT VALUE OINT PROB DEBT VALUE 235 POSSIBLE STATES JOINT PROBABILITIES 5400 236 RAIN -RAIN 0.01 40000 237 0.08 720000 57600 RAIN-WARM 0.1 90000 238 RAIN HOT 0.16 239 WARM-WARM 900000 144000 240 WARM-HOT 900000 360000 241 0.25 225000 242 882000 BOND HOLDERS GAIN 882000- 864000 243 С 18000 244 STOCKHOLDERS GAIN 18000 (GAIN OF BONDHOLDERS IS LOSS OF STOCK HOLDERS) marginal tax PB ROPI APV ROSS price quote EVA MVA LEVERAGED BUY SWAP distress BRIGHAN CAP GAIN Sheeti Sheet2 Sheet3 4deberkMARGIN MONEY erences: AL125 21-05-2019