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:

What is the value of each company before the merger? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

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 and round your answers to the nearest whole number, e.g., 32.)

If the companies 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 and round your answers to the nearest whole number, e.g., 32.)

What would be the value of the merged company? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

  

What would be the value of the merged company’s debt and equity? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

References

eBook & Resources

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:

Explanation / Answer

a. Value of Bentley = (0.70*312000)+(0.30*121000) = $254,700

Value of Rolls = (0.70*282000)+(0.30*91000) = $224,700

b. Value of equity = Value of company - value of debt, however if debt>equity, the amount of equity will not be -ve, it will be considered 0.

and Value of debt = face value of any outstanding bonds subject to maximum of the value of the company

Value of Bentley Equity = [0.70*(312000-136000)]+[0.30*(121000-136000)] = (0.70*176000)+(0.30*0) = $123,200

Value of Bentley Debt = (0.70*136000)+(0.30*121000) = $131,500

Value of equity of Rolls = 224700-0 = $224,700

Vaule of Debt of Rolls = 0

c.

d.1 To find the value of the merged company, we need to find the value of the merged company in
each state of the economy, which is:

d.2.

The merged company will have a value greater than the face value of debt in both states of the
economy, so the value of the company’s debt is $136,000.

Since the merged company will still have $136,000 in debt, the value of the equity in a boom is
$458,000, and the value of equity in a recession is $76,000. So, the value of the merged
company’s equity is:
Merged equity value = .70($458,000) + .30($76,000) = $343,400

e.1 and e.2

The combined equity value before the merger was $347,900, but the value of the equity in the merged company is only $343,400, a loss of $4500 for stockholders.

The value of the debt in the combined companies was only $131,500, but the value of debt in the merged company is $136,000. The bondholders gained $4500, exactly the amount the stockholders lost.

Value of companies =254700+224700 479,400 Value of equity =123200+224700 347,900   Value of debt =131500+0 131,500

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.