Question

Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here:

State	Probability		Bentley			Rolls
Boom	.80		$	322,000		$	292,000
Recession	.20			126,000			96,000

Bentley currently has a bond issue outstanding with a face value of $141,000. Rolls is an all-equity company.

a.	What is the value of each company before the merger? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

    

b.	What are the values of each company’s debt and equity before the merger? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

    

c.	If the companies continue to operate separately, what are the total value of the companies, the total value of the equity, and the total value of the debt? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

    

d-1.	What would be the value of the merged company? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

     

d-2.	What would be the value of the merged company’s debt and equity? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

e-1.	How much would shareholders gain or lose in the merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. Enter a gain as a positive number and a loss as a negative number.)

   

e-2.	How much would bondholders gain or lose in the merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. Enter a gain as a positive number and a loss as a negative number.)

     

Answer 1

A B D 1 a) Value of Bentley $ 282,800 =322000*80%+126000*20% $ 252,800 -292000*80%+96000*20% 2 Value of Rolls 4 b) Equity of Rolls $ 252,800 5 Debt of Rolls Equity of Bentley $ 144,800 -282800-138000 | $ 138,000 =141000*80%+126000*20% | Debt of Bentley 8 9 c) value of companies Value of equity $ 535,600 $397,600 $ 138,000 $ 535,600 Value of debt 12 13 d-1) Merged company value 14 15 d-2) Value of debt 16 Value of equity $ 141,000 $394,600 17 $3,000 18 e-1) Shareholders' gain or loss 19 20 e-2) Bondholders' gain or loss $ 3,000

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