Question

Goodday is merging with Baker, Inc. Goodday has debt with a face value of $80 and Baker has debt with a face value of $40. The pre-merger values of the firms given two economic states with equal probabilities of occurrence are as follows: Picture What will be the gain or loss to the current shareholders of Goodday if the merger provides no synergy?

Answer 1

Answer:

Therefore  the gain or loss to the current shareholders of Goodday if the merger provides no synergy is -$10

Explanation:

Given:

The Total debt remains same after merger at Pre-merger value = $80 + $40 = $120

The  Value of entities together in Economic state 1 = $160 + $20 = $180

Net equity in economic state 1 = Value of entities – total debt

= $180 - $120 = $60

Then,

The Value of entities in Economic state 2 = $40 + $80 = $120

Net equity in economic state 2 =

= $120 - $120 = $0

The Both states are equally possible.

Expected value of combined entity = ($60 + $0)/2 = $30

Market value of Goodday equity before merger = $40

Synergy effect = Expected value of combined entity - Market value of Goodday equity before merger= $30 - $40 = -$10