Problem:
Bentley Corp. and Rolls Manfacturing are considering a merger. The possible states of the economy and each company's value are below:
State Probability Bentley Rolls
Boom 0.7 $280,000 $250,000
Recession 0.3 $100,000 $70,000
Bentley currently has a bond issue outstanding with a face value of $125,000. Rolls is an all-equity company.
a. What is the value of each company before the merger?
b. What are the values of each companys debt and equity before the merger?
c. If the companies continue to operate separately, what are th total value of the companies, total value of equity, and total value of debt?
d. What would be the value of the merged company? What would be the value of the merged company debt and equity?
e. Is there a transfer of wealth in this case? Why?
f. Suppose that the face value of Bentley's debt was $90,000. Would this affect the transfer of wealth?