Calculate the current required return to equity

Assignment Help Financial Management

Reference no: EM13946992

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: EM13946992

Questions Cloud

What is the six-month forward exchange rate : The 6-month U. S. T-bills have a nominal rate of 8%, while the default-free German bonds that mature in 6 months have a nominal rate of 6%. In the spot exchange market, one euro equals $0.70. If interest rate parity holds, what is the 6-month forward..

Purchasing power parity holds-what is the spot exchange rate : A laptop costs $1,300 in the United States. The same laptop costs 930 British pounds. If purchasing power parity holds, what is the spot exchange rate between the British pound and the dollar? According to the spot rate calculated in (a)how many Brit..

What security comes closest to being riskless : Suppose you owned a portfolio consisting of $250,000 of U.S. government bonds with a maturity date of 30 years. Would your portfolio be riskless? What if your portfolio consisted of $250,000 of 30-day Treasury bills? Every 30 days your bills mature, ..

What is the enterprise value for both companies : Look up Amazon (AMZN) and Ali Baba Group (BABA) stocks on yahoo finance and answer the following. Which one is more liquid? Explain. What is the enterprise value for both companies?

Calculate the current required return to equity : 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%. Calculate the current required return to ..

Producing a return that is equal to the required return : If an investment is producing a return that is equal to the required return, the investment's net present value will be:

Producing return that is equal to the required return : If an investment is producing a return that is equal to the required return, the investment's net present value will be:

The tax basis of property acquired in like-kind exchange : The tax basis of property acquired in a like-kind exchange must be allocated between land and improvements: a. in the same ratio as used by the previous owner. b. in a ratio that reflects relative market values of land and improvements at the time of..

Analysis is most similar to computing the return on assets : Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?

User Account

All Pages