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Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase it cash inflows by $ 25,000 for each of the next 5 years and by $ 50,000 for each of the following 5 years. Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 12% to 15%, if the merger is undertaken. The cash price of Benson is $ 125,000.
Would you recommend the merger?
Would you recommend the merger if Dodd could use the $ 125,000 to purchase equipment that will return cash inflows by $ 40,000 per year for each of the next 10 years?
If the cost of capital did not change with the merger, would your decision in part b be different? Explain.
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Fiske Roofing Supplies' stock has a beta of 1.43, its required return is 11.75%, and the risk-free rate is 3.30%. What is the market risk premium? And what is the required rate of return on the market?
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Suppose the rate of return on a 10-year T-bond is 6.55%, the expected average rate of inflation over the next 10 years is 2.0%, the MRP on a 10-year T-bond is 0.9%, no MRP is required on a TIPS, and no liquidity premium is required on any Treasury se..
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