Question

Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 7%, 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 $15.621 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 6%, and the risk-free rate is 5%. BEA is considering increasing its debt level to a capital structure with 50% 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 13%. BEA has a beta of 1.1.

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 50% 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 50% debt? Do not round intermediate calculations. Round your answer to two decimal places. __ %

What is the total value of the firm with 50% 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

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 V General = * Wrap Text *Merge & Center - Merge Center SF $ 4:0 .00 88 Insert Delete Format Calibri 11 A A = = E Copy Paste Format Painter BI U DA Clipboard Font B1119 fx AV AW AX AY AZ % % Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill 2 m Sort & Find & 2 Clear Filter Select Editing Alignment Cells BA BB BC BD BE BE BG BH BI BJ 103 104 beckman 105 106 107 108 109 D = 20, S = 40 x 2 = 80, LEVERED BETA =1.1 unlevered beta = levered beta /(1+(D/S)(1-t)) unlevered beta = 1.1/(1+ (20/80)(1-0.4)) = 0.9565 0.96 110 releveraging beta levered beta = unlevered beta *(1 + (D/S)(1-t)) levered beta = 0.9565*(1 + (50/50)(1-0.4)) = EE 1.5304 111 112 113 114 115 116 1.53 Ke = Rf + beta (Rm-Rf) Ke = 5% + 1.5304(6%)= 14.183% 14.18% 117 wacc = wd*kd(1-t) + we*ke wacc = 0.50*13%*(1-0.4) +0.50*14.183% = 118 10.991% 10.99% 119 value of firm = EBIT(1-t)/ WACC value of firm = 15.621(1-0.40)/0.10991 = 85.273 120 121 122 123 N Rea N RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT IRRnpvbeta ferences BOND OPTION TO WAITSTEIN II BOJ 120% - _ + 199 * 10 ENG 01-12-2019 ...B