(a) You have been asked to assess the impact of a proposed acquisition on the beta of a firm and have been provided the following information on the two firms involved in the deal: No. of Shares Outstanding Acquirer 1,500 Share Price $8.00 Market & Book Value of Debt $3,000 Book Value of Equity $8,000 Levered Beta 1.2 Tax rate 40% Bond Rating AAA Default spread 0.5% Target 1,000 $6.00 $4,000 $8,000 1.5 40% BBB 2.5% The risk-free rate is 4% and the equity risk premium is 6%. Estimate the unlevered beta of the combined firm. i. ii. iii. Now assume that Acquirer plans to retire all of Target's debt and that it will be able to buy Target's equity at the current market price. If Acquirer would like to have a levered beta of 1.35 for the combined firm after the transaction, estimate how much new debt it will need to raise to finish this acquisition. Finally, assume that the bond rating for the combined firm will drop to A+ after the transaction, with a default spread of 1.5%, estimate the cost of capital for the combined firm after the merger.