When firm A and firm B merge, we may use the weighted average of premerger factor exposures of two firms as the factor exposure for the new merged firm.

(a) Show that the expected return implied by the factor exposure of the merged firm is the weighted average of the premerger expected returns of the two original firms.

(b) If there is synergy from the merger, would the procedure just described be reasonable?

Answer rating: 100% (QA)

a Expected Return Implied by Factor Exposure of Merged Firm To show that the expected return implied by the factor exposure of the merged firm is the ... View the full answer