Sunburn Sunscreen has a zero coupon bond issue outstanding with a $11,000 face value that matures in one year. The current market value of the firm's assets is $13,100. The standard deviation of the return on the firm's assets is 29 percent per year. Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $43,000 that matures in one year. The current market value of the firm's assets is $46,600. The standard deviation of the return on the firm's assets is 35 percent per year. Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 19 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. a-1 What is the combined value of equity in the two existing companies?

Suppose that fixed costs for a firm in the automobile industry (start-up costs of factories, capital equipment, and so on) are $5 billion and that variable costs are equal to $17,000 per finished automobile. because more firms increase competition in the market, the market price falls as more firms enter an automobile market, or specifically, , where n represents the number of firms in a market. assume that the initial size of the u. s. and the european automobile markets are 300 million and 533 million people, respectively. a. calculate the equilibrium number of firms in the u. s. and european automobile markets without trade. b. what is the equilibrium price of automobiles in the united states and europe if the automobile industry is closed to foreign trade? c. now suppose that the united states decides on free trade in automobiles with europe. the trade agreement with the europeans adds 533 million consumers to the automobile market, in addition to the 300 million in the united states. how many automobile firms will there be in the united states and europe combined? what will be the new equilibrium price of automobiles? d. why are prices in the united states different in (c) and (b)? are consumers better off with free trade? in what ways?