Sporty Limited and MaxSport Inc. have agreed to merge and form SportyMax Enterprises. The companies are exactly alike except for location. Sporty Limited is located in Scarborough and MaxSport Inc. in Victoria. The end of period value of each firm is determined by the weather, as shown.
Weather Probability Value
Hot 0.30 $5,000,000
Warm 0.50 $8,000,000
Rainy 0.20 $4,000,000
Each company has an outstanding debt claim of $5,000,000.
Due to synergies VSportyMax is estimated to be = (VSporty + VMaxSport)1.2
a. What is the probability distribution of the value of the combined firm after the merger?
b. What is the probability distribution of the end of period debt values and stock values after the merger?
c. Show that the value of the combined firm is the sum of the individual values + synergy.
d. Show that the creditors and stockholders are better off in the combined firm than they would have been if the firms remain separate.