Given the results of Problem 19.6, suppose that the merged firm has 1000 shares outstanding.
Furthermore, suppose that the shareholders decide to issue $1000 of new debt (which is not subordinate to outstanding debt), maturing in four years, and invest the proceeds in marketable securities, so that the new value of the merged firm is $5000.
What will be the new price per share? Assume the merged firms instantaneous variance is unchanged by this investment.