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    Beta Calculations and Mergers

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    Simpson Inc. is considering a vertical merger with the Lachey Company. Simpson currently has a required return of 11%,while Lachey's required return is 15%. The market risk premium is 5% and the risk-free rate is 5%. Assume the market is in equilibrium. If Simpson is going to make up 2/3 of the new firm (and Lachey will comprise the remaining 1/3), what will be the beta of the new merged firm?

    a. 1.47
    b. 1.61
    c. 1.79
    d. 1.93
    e. 2.05

    Our class notes, text, and my solutions manual has few to none of these types of examples. Can someone direct me, should I apply Bl=Bu[1+(1-T)(D/E)]?

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    Solution Summary

    This solution shows step-by-step calculation to determine the beta for Simpson and Lachey, and then the beta for the merged company.