1. Mona Electronics is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, r_RF, is 7.5%, the market risk premium, RPM, is 9.0%, and the firms tax rate is 40%. Currently, the cost of equity, r_s, is 17.25% as determined by the CAPM. What would be the estimated cost of equity if the firm used 60% debt?

2. Simon Corporation is considering the acquisition of Ingram Company. Ingram has a capital structure

consisting of $7.5 million (market value) of 11% bonds and $15 million (market value) of common stock.

Ingram's pre-merger beta is 1.36. Simon's beta is 1.02, and both it and Ingram face a 40% tax rate.

Simon's capital structure is 40% debt and 60% equity. The free cash flows from Ingram are estimated to be

$4.5 million for each of the next 4 years and a horizon value of $15 million in Year 4. Tax savings are

estimated to be $1.5 million for each of the next 4 years and a horizon value of $7.5 million in Year 4. New debt

would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of

8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.

What is the value of Ingrams equity to Simon? (Round your answer to the closest thousand dollars.)