Question

Brite Industries has agreed to merge with Nu-Day in exchange for receiving shares in the combined firm equal to Brite's current market value. There are two economic scenarios with equal probabilities of occurrence that must be considered. The market value of Brite will be either $45 a share or $30 a share depending on the economic state. Similarly, the market value of Nu-Day will be either $75 or $50 a share. What value per share will the original Nu-Day shareholders receive in the combined firm assuming no synergy is created by the merger?

A) $54.25 B) $63.50 C) $62.50 D) $57.75 E) $56.00

I know answer is $62.50, but need to see why. Please show work and thumbs up guaranteed

Answer 1

Market value of Nu-Day share will be either $75 or $ 50

The value per share will the original Nu-Day shareholders receive in the combined firm Nu-Day share is equal to the current market value of Nu-Day share, because the exchange rate is as per the market value

The current value per share of Nu-Day is  $75*.50+$50*.50

=$37.5+$25

=$62.5