Speedy Auto Parts is considering a merger with Freeman Car Parts. Freeman'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 Speedy acquires Freeman, 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%.
a) Calculate the current required return to Freeman's equity
b) Calculate Freeman's unlevered cost of equity? $
c) What will be Freeman's required rate of return on equity after it is acquired? Hint: Calculate Workman's levered cost of equity at the new capital structure with the new cost of debt.