Bentley Corp. and Rolls Manufacturing are considering a merger. The Possible sta

Question

Bentley Corp. and Rolls Manufacturing are considering a merger. The Possible states of the economy and each company's value in that state are shown here: Bentley currently has a bone issue outstanding with a face value of $126,000. Rolls is an all-equity company. What is the value of each company before the merger? (Do not round Intermediate calculations.) What are the values of each company's debt and equity before the merger? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.) If the company's continue to operate separately, what are the total value of the companies, the total value of the equity, and the total value of the debt? (Do not round intermediate calculations.) What would be the value of the merged company? (Do not round Intermediate calculations.) What would be the value of the merged company's debt and equity? (Do not round Intermediate calculations.) How much would shareholders gain o' lose in the merger? (Do not round intermediate calculations. Enter a gain as a positive number and a loss as a negative number.) How much would bondholders gain or lose m the merger? (Do not round Intermediate calculations. Enter a gain as a positive number and a loss as a negative number.)

Explanation / Answer

a)

value of benteley = 0.7 * 290000 + 0.3 *110000 = 236000

value of rolls = 0.7 * 260000 + 0.3 * 80000 = 206000

b)

equity of rolls = 206000
debt of rolls = 0
equity of bentley = 0.7 * (290000-125000) + 0.3(0) = 115500

debt of debteley = 236000 - 115500 = 120500

c)

values of company = 442000

value of equity = 321500

value of debt = 120500

d1)

merged company value = 0.7 * (290000+260000) + 0.3 * (110000+80000)

= 442000

value of equity = 0.7 * 425000 + 0.3 * 65000 = 317000

value of debt = 442000 - 317000 = 125000

e1) share holder loss = 321500 - 317000 = 4500

e2) bondholder gain = 125000 - 120500 = 4500

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