2. Estimate appropriate weighted average cost of capital (WACC) for the combined firm. A standard approach is to use industry information (a set of comparable firms).

a. First, calculate the beta of a hypothetical all-equity (unlevered beta) firm in the industry based on three comparable firms listed in Exhibit 4 (you need to first calculate unlevered beta for each of the three comparable firms and find industry mean of unlevered beta). Then, using CAPM, calculate cost of unlevered equity using information in Exhibit 5 (use risk-free rate as 10-year Treasury note).

b. Estimate target leverage ratio (D/E) for the combined firm using the industry leverage. Using the industry target leverage ratio, and unlevered beta calculated in a), calculate levered beta for the combined firm. Using CAPM, calculate cost of equity for the combined firm. Harsh