Use the Information Below to Answer the Following Question

question 16

Multiple Choice

Use the information below to answer the following question.
Alpha is considering a purely financial merger with Beta. Alpha currently has a market value of $14 million, an asset return standard deviation of 55 percent, and pure discount debt of $6 million that matures in four years. Beta has a market value of $6 million, an asset return standard deviation of 60 percent, and pure discount debt of $2 million that matures in four years. The risk free rate, continuously compounded, is 3.5 percent. The combined equity value of the two separate firms is $14,180,806. By what amount will the combined equity value change if the merger occurs and the asset return standard deviation of the merged firm is 45 percent?

• A) −$548,285
• B) −$314,007
• C) $0
• D) $99,087
• E) $286,403

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