(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 $14.442 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 6%. 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. a. What is BEA's unievered beta? Use market value D/S (which is the same as wa/w.) when unlevering. Round your answer to two decimal places. 0.870 b. 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 1.276 3 Cost of equity 11.770 c. 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. 7.081 What is the total value of the firm with 35% debt? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
(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 $14.442 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 6%. 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. a. What is BEA's unievered beta? Use market value D/S (which is the same as wa/w.) when unlevering. Round your answer to two decimal places. 0.870 b. 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 1.276 3 Cost of equity 11.770 c. 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. 7.081 What is the total value of the firm with 35% debt? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text: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
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 $14.442 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 6%. 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.
a. What is BEA's unlevered beta? Use market value D/S (which is the same as wa/w,) when unievering. Round your answer to two decimal places.
0.870
b. 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
1.276
Cost of equity
%
11.770
c. 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.
7.081 %
What is the total value of the firm with 35% debt? Do not round intermediate calculations. Enter your answer in millions. For example, an answer
of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
12.239
million
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education