Answer (A) is correct . The coinsurance effect can be offset by issuing additional debt after the combination, thereby increasing the firm’s unsystematic risk and decreasing the value of debt. Moreover, the greater leverage may increase the firm’s value. Another possibility is to reduce debt prior to the combination at the lower, pre-combination price and then to reissue the same amount of debt afterward.
Answer (B) is incorrect because Debt should also be issued after the combination.
Answer (C) is incorrect because Debt should also be retired before the combination.
Answer (D) is incorrect because Retirement of debt before and issuance of debt after a combination are strategies to reduce the coinsurance effect.
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