Question

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. The firm's EBIT is $14.070 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 5%. BEA is considering increasing its debt level to a capital structure with 35% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 8%. BEA has a beta of 1.0. What is the total value of the firm with 35% debt? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places. $    million What is BEA's unlevered beta? Use market value D/S (which is the same as wd/ws) when unlevering. Do not round intermediate calculations. Round your answer to two decimal places. What are BEA's new beta and cost of equity if it has 35% debt? Do not round intermediate calculations. Round your answers to two decimal places. Beta:   Cost of equity:   % What are BEA’s WACC and total value of the firm with 35% debt? Do not round intermediate calculations. Round your answer to two decimal places.   %

Hide Feedback

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A Fill Z Sort & Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Find & Select Cells BD BE BE BG BH BI Calibri 11 A A = = = V Wrap Text General E Copy Paste BI U D- DA SF Merge Format Painter Merge & Center - Center $ % % , 4:0 .00 :.: Clipboard Font Alignment CD Number BF146 L AV AW AX AY AZ BA BB BC 144 beckman 145 D = 20, S = 40 x 2 = 80, LEVERED BETA =1 146 unlevered beta = levered beta /(1+(D/S)(1-t)) 147 unlevered beta = 1/(1+(20/80)(1-0.4)) = 0.8696 148 149 150 releveraging beta 151 levered beta = unlevered beta *(1+(D/S)(1-t)) 152 levered beta = 0.8696*(1+(35/65)(1-0.4)) = 1.1505 153 154 Ke = Rf + beta (Rm-Rf) 155 Ke = 5% + 1.1505(4%)= 9.602% 0.87 1.15 9.60% 156 157 wacc = wd*kd(1-t) + we*ke wacc = 0.35*8%*(1-0.4) +0.65*9.602%= 158 7.921% 7.92% 159 160 value of firm = EBIT(1-t)/WACC value of firm = 14.070(1-0.40)/0.07921 = 106.573 161 162 H RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT I RRnpvbeta ferences Rea BOND OPTION TO WAITSTEIN II BOU 130% 0 199 * 10 ENG 28-11-2019 ...B