Consider the following two companies, Acquisitive Corp (AC) and Target Corp (TC). The relevant information to undertake an option-based valuation of their equity is provided below:
AC (TC) has a market value of assets of $20 million ($10 million). AC (TC) has debt of repayment value of $6 million ($4 million) maturing in 10 years. The standard deviation of asset returns of AC (TC) is 60% (70%). The risk free rate is 2.50%.
AC and TC are proposing to merge to form the ATC Corp. There are some synergies to the merger and as a result of these synergies the market value of the combined firm is $32 million. Further, the risk of the firm is substantially reduced to a standard deviation of assets returns of 25%.
16) What would be the change in the market value of debt if the proposed merger were to go through?
A) $3.660 million
B) -$3.660 million
C) $2.425 million
D) -$2.425 million
E) None of the above