averagecostofcapitalandthevalueofthefirmsareshownin
Table 15.3.
TABLE 15.3Value of Lube& Auto, Dalton Motors,and
Combined Firm
Thecostofequity(ordebt)forthecombinedfirmisobtained
bytakingtheweightedaverageoftheindividualfirm’scost
of equity (or debt); the weights arebased on the relative
marketvaluesofequity(ordebt)ofthetwofirms.Sincethese
relativemarketvalueschangeovertime,thecostsofequity
and debt for the combined firm also change over time.
9 Thevalueofthecombinedfirmisthesameasthesumof
thevaluesoftheindependentfirms,indicatingthatthereisno
value gain from diversification.
10
Thisequalitydoesnotimply,however,thattheshareholders
in the bidding and target firms are indifferent about such
takeovers,sincethebiddingfirmpaysasignificantpremium
over themarket price.To theextent thatthesefirms were
correctlyvaluedbeforethemerger,thepaymentofapremium
overthemarketpricewilltransferwealthfromthebidding
firm to the target firm. There is also the possibility that