Investing in Other Business Lines
In the analysis above, we have argued that firms should invest in projects as long as the return on equity is greater than the cost of equity. Assume that a firm is considering acquiring another firm with its debt capacity. In analyzing the return on equity the acquiring firm can make on this investment, we should compare the return on equity to
a. the cost of equity of the acquiring firm.
b. the cost of equity of the acquired firm.
c. a blended cost of equity of the acquired and acquiring firm.
d. none of the above. Explain.