Problem:
A parts manufacturer is an acquisition target for your firm. The target has $51M in debt capital, which has an average interest rate of 8.5%. They have $80M in equity capital. The target's beta is 1.04, the risk free rate of return is 3%, and the market risk premium is 6%. The tax rate is 40%. Your firm plans on making changes in the target's operations after the acquisition, so that the target firm's beta will be 0.65.
Required:
Question: What is the required return for this acquisition?
Note: Be sure to show how you arrived at your answer.