 So, the implications of options analysis can also be seen with reference to merger analysis. Now diversification is considered as a key reason behind the mergers of the margarine firms, but a question arises that whether diversification is a good reason to merge, to see this implication of diversification as a good reason to merge. Let see an example. We have two firms, firm SS and firm PW. These two firms have highly seasonal cash flows so they always worry about their cash flows during the off seasons. Now there is a proposal of these firms to merge with each other and it is said that this proposed merger would more stabilize the firm cash flows for the new entity. In the way that the diversifying seasonal variation away will reduce the chances for the new firm's bankruptcy very much less likely. Remember that these two firms have different business operations so this means that this new proposed merger is a financial merger purely. So there will be no synergy for the new firm or the merger will have no synergetic effect upon the new firm. To see the difference between pre-merger and post-merger situations we have the corresponding data. On the screen we can see the market value of assets of SS and PS firms as to 30 million and 10 million dollars respectively. The SS firm has 12 million dollars outstanding debt for PW the debt outstanding amount is 4 million dollars. Both of the firm has debt maturity of 3 years period. SS firms return on assets has a standard deviation of 0.5 whereas for PW's return on assets this standard deviation is 0.6. If we use the risk free rate compound did continuously at 5% we can view each firm's equity as a call option and then using the black skull model we have certain equity values for the both firms whereas the market value of equity for SS firm is 20.4 to 4 million dollars and for PW firm it is 7.001 million dollars and the market value of debt of SS firm is 9.576 million dollars whereas for PW firm it is 2.99 million dollars. So we see that after the merger combined firms assets are 10 40 million dollars which is the case of the pre-merger value. This means that there is neither any value creation nor any value debt structure. Total face value of the debt is still 16 million dollars and if we assume that standard deviation for the combined firms return on assets is equal to 40%. Now if we assume that the combined firms assets returns standard deviation is standard at 40% then what is the impact of merger? Again we have a post merger value of the combined firms that the market value of the combined firms assets is 40 million dollars. The face value of the combined firms debt is 16 million dollars with the debt maturity of three years and the combined standard deviation of the combined firms return on assets is 40%. Then the post merger values of the combined firms is that market value of equity is 26.646 million dollars and the market value of debt of the combined firms is equal to 13.354 million dollars. If we look at this picture we see that the situation is not good rather it is more terrible for the firms stockholders at least because after the merger they are losing their combined equity value as 2.779 million dollars whereas the situation is very good for the bondholders of the firm because the decline in the combined equity of the firm is going towards the debt holders of the combined firm. So, there is a equal shifting of value of money from the shareholders of the combined firm to the debt holders of the combined firm in a new firm. This type of merger is neither creating any value for the stockholders or nor it is destroying their value it just shifted some value from the pocket of the shareholders to the pocket of the stockholders to the bondholders concluding this scenario you see that there is a pure financial merger which is good for the creditors but not good for the stockholders of a firm it just reduces the volatility of the firm firms ROA as the diversification which is in fact benefiting the bondholders of the firm because now there is a much likely chances of default in this case. So, the rise in value is there but it does not raising the value of the firm's assets. This type of merger is in fact termed as a co-insurance effect because in this type of mergers each firm is effectively ensuring the other firm's debt.