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Merger Valuation: what will be Company B's WACC after acquisition by Company A

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When performing merger valuation: if Company A has 1 million shares outstanding worth $10 per share, and a capital structure that consists of 30% debt at a 9% interest rate.

Company A is considering buying company B, which has 500,000 shares outstanding worth $5 each & no debt. Company B's cost of equity is 12% & Company A's cost of equity is 15%.

If, after the purchase, Company A recapitalizes Company B to have the same capital structure as Company A, with debt at the same interest rate, what will be Company B's WACC? Since both firms are in the 40% tax rate, does it even come into play?

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In a 179 word solution, the response explains the answer and demonstrates with calculations.

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Company A:
Value of Equity=10*1million=10 million
Value of debt =10 million*0.3 / (1-0.3)=4.29 million
Total Value = 14.29 million
WACC for firm A = 10/14.29*15%+4.29/14.29*9%*(1-40%) =12.12%

Company B will have the same capital structure after the ...

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