Stock-bond holders each gain or lose if merger is undertaken

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Reference no: EM131973389

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 they are located in diferent 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 .01 $410,000

Warm .04 $590,000

Hot .05 $1,115,000

The weather conditions in each town are independent of those in the other.

Furthermore, each company has an outstanding debt claim of $590,000. Assume that no premiums are paid in the merger.

Question: How much do stockholders and bondholders each gain or lose if the merger is undertaken?

Bondholder gain/loss $______

Stockholder gain/loss $______

Reference no: EM131973389

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