Holland Auto Parts Is Considering a Merger with Workman Car

question 13

Multiple Choice

Holland Auto Parts is considering a merger with Workman Car Parts.Workman'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 Holland acquires Workman,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%.What will Workman's required rate of return on equity be after it is acquired?

• A) 7.4%
• B) 8.9%
• C) 9.3%
• D) 9.6%
• E) 9.7%

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