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hi sir
i am attempting the makonis question. i realised that the market value of the debt of makonis was not included.
nuvola co is all equity financed because the asset beta= equity beta
if you take the asset beta and equity beta of Makonis you can calculate the market value of debt
in the marking scheme only the market value of equity was taken into consideration
You must tell me which exam the question was in (e.g. June 2010; December 2008; or whenever)
I can’t remember which exam every question appeared in, and I certainly can’t spend the time now looking through every exam to find one question 🙂
Two things:
First, the question is only wanting to know the additional equity value (and we already know the current equity values of the two firms because we know the share price and we know the number of shares).
Second, the question does say that the debt to equity ratio will be 40:60 after combining, so having calculated the total value of the combination (using free cash flow as instructed) it must be that the new value of the equity is 60% of the total.
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