Suppose Sunburn Sunscreen (Problem 21) and Frostbite Thermalwear (Problem 23) have decided to merge. Since the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 16 percent per year.
a. What is the combined value of equity in the two existing companies? Value of debt?
b. What is the value of the new firm’s equity? Value of debt?
c. What was the gain or loss for shareholders? For bondholders?
d. What happened to shareholder value here?