Firm X has equity worth 20M and debt worth 10M. The firm has an equity beta of
Question:
Firm X has equity worth 20M and debt worth 10M. The firm has an equity beta of 2, and its debt is risk free.
Firm Y is all-equity financed. The value of that firm is 10M. Firm Y has an equity beta of 1.
Firms X and Y merge and change their name to "Firm Z". The merged firm assumes all of the assets of firms X and Y as well as firm X's debt. After the merger, this debt continues to be risk free and worth 10M.
Assume a perfect Modigliani-Miller world with no taxes. Also, the merger involves no synergy gains (i.e., the value of the assets is unchanged by the merger).
Compute:
a) The value of firm Z's assets.
b) The value of firm Z's equity.
c) Firm Z's asset beta.
d) Firm Z's equity beta.
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen