Suppose firm A and firm B are planning on merging. There are no costs or synergy benefits from the merger. Before the merger firm A has an issue of bonds outstanding. These bonds entitle the holder to a payment of $80 million when the bonds mature next year. Firm B has no debt and the risk free interest rate is 0. (hint- that means you do not need to discount any cash flows) With probability .5 there will be a “boom” in the economy next year and with probability .5 there will be a recession. The value of firm A’s assets and firm B’s assets in a recession and a boom are as follows: “boom” (probability .5) “recession” (probability .5) Firm A asset value $160 million $50 million Firm B asset value $100 million $30 million (a) Using the analysis from class on the coinsurance effects of merging, what will be the change in the value of the bonds if the firm’s merge? (b) Briefly indicate two ways that the firm could solve the problem of the coinsurance effects of merging?