In 2018, IBM announced the acquisition of Red Hat (RHT). You have the following information about the two firms before the acquisition.

	IBM	RHT
Market Capitalization ($B)	102	24
Book Value of Debt ($B)	34	0
Equity Beta	0.90	1.10
Debt Beta	0.10

The risk-free rate is r_f = 2.0%, and the market risk premium is r_mr_f = 7.0%.

(6 points) Compute the asset beta and weighted average cost of capital of IBM and RHT before the acquisition.

(4 points) Consider newIBM, that is, the combined firm overall after the acquisition. [Hint: Think of newIBM as a portfolio consisting of IBM and RHT.]

(2 points) What fraction of newIBM's assets does the RHT division comprise?

(2 points) Compute the asset beta for newIBM after the acquisition.

(5 points) Suppose that IBM finances the acquisition by issuing bonds (i.e., additional debt) and that its debt beta remains unchanged.

(1 points) What is newIBM's debt-to-value ratio after the acquisition?

(2 points) What is newIBM's equity beta after the acquisition?

(2 points) Explain why the equity beta of IBM goes up after the acquisition.