Holland Auto Parts Is Considering a Merger with Workman Car

question 6

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%.Using the Compressed APV Model, 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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Definitions:

Contribution Margin Mix

The relative proportion of different products or services, contributing to the total contribution margin, highlighting how combination effects overall profitability.

Break-Even Point

The point at which total costs and total revenue are equal, meaning there is no net loss or gain, and one has 'broken even'.

Unit Contribution Margins

The difference between the selling price per unit and variable cost per unit, indicating the contribution of each unit sold to covering fixed costs.

Fixed Costs

Expenses that do not change with the level of production or sales activities within a certain range or period.