Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face v

Question

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the firm's assets is $27,200. The standard deviation of the return on the firm's assts is 35% per year, and the annual risk-free rate is 5% per year, compounded continuously.

Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $31,000 that matures in one year. The current market value of the firm's assets is $34,000. The standard deviation of the return on the firm's assets is 39% per year. Suppose Sunburn Suncreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm's return on assets will have a standard deviation of 21% per year.

*Round all answers to 2 decimal places AND show work please.

A-1: What is the combined value of equity in the two existing companies?

EQUITY $________

A-2: What is the combined value of debt in the two existing companies?

DEBT $__________

B-1: What is the value of the new firm's equity?

EQUITY $__________

B-2: What is the value of the new firm's debt?

DEBT $____________

C-1: What was the gain or loss for shareholders?

GAIN/LOSS $___________

C-2: What was the gain or loss for bondholders?

GAIN/LOSS $___________

Explanation / Answer

Sunburn Sunscreen Frostbite Thermalwewear Combined Bond Payable 25,000.00 31,000.00 Risk Free Rate 0f interest 5% 5% Matures in Year 1.00 1.00 Present Value 23,809.52 29,523.81 Net assets 27,200.00 34,000.00 61,200.00 Less: Value of debt 23,809.52 29,523.81 53,333.33 Value of equity 3,390.48 4,476.19 7,866.67

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