Calculate the current required return to freeman

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Reference no: EM131015452

Speedy Auto Parts is considering a merger with Freeman Car Parts. Freeman'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 Speedy acquires Freeman, 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%.

a) Calculate the current required return to Freeman's equity

b) Calculate Freeman's unlevered cost of equity?$

c) What will be Freeman's required rate of return on equity after it is acquired? Hint: Calculate Workman's levered cost of equity at the new capital structure with the new cost of debt.

Reference no: EM131015452

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