Firm a has an estimated beta of 16 and is considering

Question

Firm A has an estimated beta of 1.6 and is considering acquiring another firm that has a beta of 1.2 and both companies are exactly the same size.

1. What is the expected new beta for the combined firm?
2. The risk free rate of return is estimated at 7% and the market return is estimated at 12%. What is the estimated required return of investment before and after the merger?
3. Firm A is expected to pay $1 dividend next year (D1=$1). The dicvidend is expected to grow at 6% per year if the merger is completed. Future dividends are expected to grow at 7% as a rusult of the merger.
4. What is the share value of Firm A before the merger?
5. What is the new share value after the merger is completed?
6. Is the merger recommended, why or why not?