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Problem:

Kelly Tubes is considering a merger with Reilly Tires. Reilly'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 Kelly acquires Reilly, 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%.

Required:

Question 1: What will Reilly's required rate of return on equity be after it is acquired?

Note: Explain all calculation and formulas.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91161990

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