Holland Auto Parts Is Considering a Merger with Workman Car

Multiple Choice

Holland Auto Parts is considering a merger with Workman Car Parts.Workman'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 Holland acquires Workman, 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%.Using the Compressed APV Model, what will Workman's required rate of return on equity be after it is acquired?

A) 7.4%
B) 8.9%
C) 9.3%
D) 9.6%
E) 9.7%