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 $______