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Problem:

Kelly Tubes is considering a merger with Reilly Tires. Reilly's market-determined beta is 1.4, and the firm is financed with 30% debt, at an interest rate of 8%, and its tax rate is 25%. If Kelly acquires Reilly, it will increase the debt to 50%, 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 5%.

Required:

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

Note: Explain all steps comprehensively.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91170472

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