By what amount will equity value of combined company change

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Question - ABC Inc. has a proposal for a purely financial merger with XYZ Inc. The current market value of ABC is $15 million, a standard deviation of asset-return of 56 percent, and zero coupon bonds of $6 million that mature in four years. XYZ Inc. has a market value of $6 million, a standard deviation of asset-return of 65 percent, and zero-coupon bonds of $2 million that mature in four years. The continuously compounded risk-free rate is 3.5 percent. By what amount will the equity value of the combined company change if the merger occurs and the asset return standard deviation of the merged firm is 45 percent?

Reference no: EM133000795

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