Simpson Inc. is considering a vertical merger with The Lachey Company. Simpson c

Question

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 45% of the new firm (and Lachey will comprise the remaining 55%), what will be the beta of the new merged firm? There will be no additional infusion of debt in the merger.
Answer
2.00
1.82
1.64
1.77
1.74
Please tell me how you came up with the answer

Explanation / Answer

Hi, If you like my answer, please rate my answer first and according to my answer...that way only I can earn points. Thanks for Simpson, 11% = 5% + betaSimpson*5% or betaSimpson = 1.2 for Lachley, 15% = 5% + betaLachley*5% or betaLachley = 2 Merger beta = 45% * betaSimpson + 55%*betaLachley = 1.64

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