Goodday is merging with Baker, Inc. Goodday has debt with a face value of $80 and Baker has debt with a face value of $40. The pre-merger values of the firms given two economic states with equal probabilities of occurrence are as follows: Picture What will be the gain or loss to the current shareholders of Goodday if the merger provides no synergy?

Therefore  the gain or loss to the current shareholders of Goodday if the merger provides no synergy is -$10

Explanation:

Given:

The Total debt remains same after merger at Pre-merger value = $80 + $40 = $120

The  Value of entities together in Economic state 1 = $160 + $20 = $180

Net equity in economic state 1 = Value of entities – total debt

= $180 - $120 = $60

Then,

The Value of entities in Economic state 2 = $40 + $80 = $120

Net equity in economic state 2 =

= $120 - $120 = $0

The Both states are equally possible.

Expected value of combined entity = ($60 + $0)/2 = $30

Market value of Goodday equity before merger = $40

Synergy effect = Expected value of combined entity - Market value of Goodday equity before merger= $30 - $40 = -$10