Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $25,000 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 assets is 35 percent per year, and the annual risk-free rate is 5 percent 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 $34,400. The standard deviation of the return on the firm’s assets is 39 percent per year. Suppose Sunburn Sunscreen 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 percent per year. a-1. What is the combined value of equity in the two existing companies? (
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
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Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $25,000 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 assets is 35 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. |
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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 $34,400. The standard deviation of the return on the firm’s assets is 39 percent per year. |
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Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm’s |
| a-1. |
What is the combined value of equity in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| a-2. | What is the combined value of debt in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b-1. | What is the value of the new firm’s equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b-2. | What is the value of the new firm’s debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c-1. | What was the gain or loss for shareholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c-2. | What was the gain or loss for bondholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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