Novell, which had a market value of equity of $2 billion and a beta of 1.50, announced that it was acquiring WordPerfect, which had a market value of equity of $1 billion and a beta of 1.30. Before the acquisition, Novells Debt to Equity Ratio (D/E) was 10 percent while WordPerfects Debt to Equity Ratio (D/E) was 3 percent. The corporate tax rate was 40 percent.

a. Calculate the unlevered betas for both firms before the acquisition

b. Calculate the unlevered beta for Novell after the acquisition.

c. Calculate the levered beta for Novell after the acquisition, assuming that the entire acquisition was financed with equity and that Novell assumed WordPerfects debt.

d. Assume that Novell had to borrow the $ 1 billion to acquire WordPerfect. Estimate the beta after the acquisition