For this problem and the next, assume the following: (a) We are dealing with a world where
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(a) We are dealing with a world where there are no taxes.
(b) The changes in the parameters affecting value are unanticipated; therefore redistribution effects are possible.
(c) Firms A and B initially have the following parameters:
(A = (B = .2 ............. Instantaneous standard deviation
TA = TB = 4 years......... Maturity of debt
VA = VB = $2,000 ...... Value of the firm, V = B + S
Rf = .06 ................... Risk free rate
DA = DB = $1,000 ....... Face value of debt
The correlation between the cash flows of firms A and B is .6. If they merge, the resultant firm will be worth $4,000 = VA + VB, but its new instantaneous variance will be
What will be the market value of debt and equity in the merged firm? If there were no other merger effects, would shareholders agree to the merger?
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Related Book For
Financial Theory and Corporate Policy
ISBN: 978-0321127211
4th edition
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri
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