The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to
ID: 2776902 • Letter: T
Question
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 except 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
Probability
Value
Rainy
.2
$380,000
Warm
.3
$560,000
Hot
.5
$1,070,000
The weather conditions in each town are independent of those in the other. Furthermore, each company has an outstanding debt claim of $560,000. Assume that no premiums are paid in the merger.
A. What are the possible values of the combined company? (Do not round intermediate calculations.)
Possible states
Joint Value
Rain-Rain
Rain-Warm
Rain-Hot
Warm-Warm
Warm-Hot
Hot-Hot
B. What are the possible values of end-of-period debt values and stock values after the merger? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.)
Debt Value
Stock Value
Rain-Rain
Rain-Warm
Rain-Hot
Warm-Warm
Warm-Hot
Hot-Hot
C. How much do stockholders and bondholders each gain or lose if the merger is undertaken? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations)
Bondholders gain or loss is
Stockholders gain or loss is
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 except 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.
Explanation / Answer
A. What are the possible values of the combined company? (Do not round intermediate calculations.) Possible states Joint Value Rain-Rain 152000 $ Rain-Warm 244000 $ Rain-Hot 611000 $ Warm-Warm 336000 $ Warm-Hot 703000 $ Hot-Hot 1070000 $ B. What are the possible values of end-of-period debt values and stock values after the merger? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.) Debt Value Stock Value Rain-Rain Rain-Warm Rain-Hot Warm-Warm Warm-Hot Hot-Hot Since information on the inventory value and original debt value is not shared, this point cannot be solved. C. How much do stockholders and bondholders each gain or lose if the merger is undertaken? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations) Bondholders gain or loss is Stockholders gain or loss is The income statement for the Company is not provided, hence this point cannot be solved.