The chocolate ice cream company and the vanilla ice cream company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike that they are located in different towns. The end-of- period value of each firm is determined by the weather as shown below, there will be no synergy to the merger.
|
State
|
Probabillty |
Value(Rs)
|
|
Rainy
|
0.1
|
100000
|
|
Warm
|
0.4
|
200000
|
|
Hot
|
0.5
|
400000
|
The weather conditions in each town arc independent of those in the other. Furthermore. each company has an outstanding debt claim of RS 200000, Assume that no premiums are paid in the merger
a. What are the possible values of the combined company?
b. What arc the possible values of end -of -period debt values and stock values ever merger?
c. Show the bond holders are better off and the stockholders are worse off in the combined firm than they would have been if the firms remained separate.