You have been tasked to assess the acquisition of XYZ Inc, a highly levered retailer, by ABC Inc, another retail company. You found the following information on the two companies:

a. Estimate the unlevered beta of the combined company after the merger (2 points)

b. ABC Inc is planning to issue shares to buy out XYZs equity. In addition, it also wants to retire some of XYZs debt. If ABC Inc would like to have a levered beta of 1.2 after the transaction, how much of XYZs debt will it have to retire? (4 points)

Company ABC Inc XYZ Inc Market Value of Equity Market Value of Debt $1000m $500m $200m $800m Beta (levered) 1.15 2.90 Company ABC Inc XYZ Inc Market Value of Equity Market Value of Debt $1000m $500m $200m $800m Beta (levered) 1.15 2.90