The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to
merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that
they are located in different towns. The end-of-period value of each firm is determined
by the weather, as shown below. There will be no synergy to the merger.
State Probability Value
Rainy .3 $ 310,000
Warm .2 490,000
Hot .5 965,000
The weather conditions in each town are independent of those in the other.
Furthermore, each company has an outstanding debt claim of $490,000. Assume that no
premiums are paid in the merger.
a. What are the possible values of the combined company? (Do not round intermediate
calculations and round your answers to the nearest whole number, e.g., 32.)
Possible states Joint Value
Rain-Rain
Rain-Warm
Rain-Hot
Warm-Warm
Warm-Hot
Hot-Hot
b. What are the possible values of end-of-period debt and stock after 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.)
Rain-Rain Debt Value Stock Value
Rain-Warm
Rain-Hot
Warm-Warm
Warm-Hot
Hot-Hot