Please include on Excel spreadsheet how you arrived to solution. <\/p>
<\/p>
Holland Auto Parts is considering a merger with Workman Car Parts. Workman's market-determined beta is 0.9, and the firm currently is financed with 20% debt, at an interest rate of 8%, and its tax rate is 25%. If Holland acquires Workman, it will increase the debt to 60%, at an interest rate of 9%, and the tax rate will increase to 35%. The risk-free rate is 6% and the market risk premium is 4%. What will Workman's required rate of return on equity be after it is acquired?<\/span><\/p> <\/p> <\/p> Calculate the current required return to Workman's equity: r<\/span>K<\/sub> = r<\/span>RF<\/sub> + b(RP<\/span>M<\/sub>) = 6% + (0.9)4% = 9.6%. Calculate Workman's unlevered cost of equity: r<\/span>sU<\/sub> = w<\/span>d<\/sub>r<\/span>d<\/sub> + w<\/span>s<\/sub>r<\/span>s<\/sub> = 0.20(8%) + 0.80(9.6%) = 9.28%. Calculate Workman's levered cost of equity at the new capital structure with the new cost of debt: r<\/span>sL<\/sub> = r<\/span>sU<\/sub> + (r<\/span>sU<\/sub> r<\/span>d<\/sub>)(D\/S) = 9.28% + (9.28% 9%)\/(0.6\/0.4) = <\/span>9.7%<\/strong>.<\/span><\/p>",
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"authors": "Pietro Alessandrini ,Michele Fratianni ,Alberto Zazzaro",
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"uri": "\/textbooks\/the-changing-geography-of-banking-and-finance-1st-edition-978-1441947208-260622",
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