Required Rate of Return of Merged Company, De-Merger

The required rate of return of a merged company or a de-merged company depends on various factors such as the risk profile of the merged company or the de-merged companies, the expected cash flows, and the prevailing market conditions.

For a merged company, the required rate of return can be calculated by taking the weighted average cost of capital (WACC) of the combined entity. WACC is the average rate of return required by investors to invest in a company, taking into account the relative weights of the company’s debt and equity capital. The WACC formula considers the cost of equity, the cost of debt, and the proportion of debt and equity in the capital structure of the merged company.

For a de-merged company, the required rate of return of each company can be calculated separately based on their respective risk profiles and expected cash flows. The required rate of return of each company can be determined by applying the capital asset pricing model (CAPM) or other models that consider the company’s risk profile and expected returns.

In general, a merged company or a de-merged company is expected to have a higher required rate of return if it is perceived to be riskier by investors, or if the expected cash flows are lower. Conversely, a company with lower perceived risk or higher expected cash flows may have a lower required rate of return. The required rate of return is an important factor in determining the valuation of a company and can impact the decisions of investors, analysts, and other stakeholders.