Goodday is merging with Baker, Inc. Goodday has debt with a face value of $80 an

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:

What will be the gain or loss to the current shareholders of Goodday if the merger provides no synergy?

–$10

$0

-$5

$5

$10

Values before merge Goodday Debt Equity Baker, Inc.: Economic State 1 $160 ) ) $20 20 0 $40 A4) 0 ) A4) A4) Market Value $100 60 A4) $50 30 2X) Equity

Explanation / Answer

Answer :- $5

The gain is $5 to the current shareholders of good day if the merger provides no synergy.

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