You have the following initial information on CMR Co. on which to base your calculations and discussion

Current long-term and target debt-equity ratio (D:E) = 1:4

Corporate tax rate (TC) = 30%

Expected Inflation = 1.75%

Equity beta = 1.6385

Debt beta = 0.2055

Expected market premium (r_M r_F) = 6.00%

Risk-free rate (r_F) = 2.15%

Assume now a firm that is an existing customer of CMR Co. is considering a buyout of CMR Co. to allow them to integrate production activities. The potential acquiring firms management has approached an investment bank for advice. The bank believes that the firm can gear CMR Co. to a higher level, given that its existing management has been highly conservative in its use of debt. It also notes that the customers firm has the same cost of debt as that of CMR Co. Thus, it has suggested use of a target debt-equity ratio of 2:6 when undertaking valuation calculations.

i) What would the required rate of return for BFS Co.s equity become if the proposed gearing structure were adopted following acquisition by the customer?

ii) Would the above project described in 1) be viable for the new owner of BFS Co.? Justify your answer (numerically).