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

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 6P
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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%.
What will Reilly's required rate of return on
equity be after it is acquired?
Transcribed Image Text: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%. What will Reilly's required rate of return on equity be after it is acquired?
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