Market value of the combined company

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Company A has 50 million outstanding shares at a price of $3. Company B has 30 million outstanding shares at a price of $2. A proposed merger between them seems likely to increase the standard deviation of their equity returns from 30% individually to 50% combined. However, this merger is expected to generate an operating synergy of $50 million. What would you expect the market value of the combined company to be after the merger? Assume the CAPM assumptions hold. Explain carefully.

Reference no: EM132566085

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