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Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its capital structu

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Answer #1

a). βU = βL/[(1 + {(1 - T)(D/E)}]

= 1.2/[1 + {(1 - 0.30)(20/80)}]

= 1.2/[1 + 0.175] = 1.2 / 1.175 = 1.02

b). βL = βU*[(1 + {(1 - T)(D/E)}]

= 1.02*[1 + {(1 - 0.30)(0.4/0.6)}]

= 1.02*[1 + 0.467] = 1.02 * 1.467 = 1.50

Cost of Equity = Risk-free Rate + [Beta * Market Risk Premium]

= 7% + [1.50 * 4%] = 7% + 5.99% = 12.99%

c). WACC = [wD * kD * (1 - t)] + [wE * kE]

= [0.40 * 11% * (1 - 0.30)] + [0.60 * 12.99%]

= 3.08% + 7.79% = 10.87%

Value of Firm = FCF / WACC = [EBIT * (1 - t)] / WACC

= [$15.729 million * (1 - 0.30)] / 0.1087

= $11.0103 million / 0.1087 = $101.245 million

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