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 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. million, and it faces a 35% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 7%. BEA is considering increasing its debt let 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 12%. BEA has a beta of 0.9. a. What is BEA's unlevered beta? Use market value D/S (which is the same as wa/ws) when unlevering. Round your answer to two decimal places. b. 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. Betal Cost of equity % c. 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. % Wha the total value of the firm with 50% debt? Do not round interm 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. million
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 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. million, and it faces a 35% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 7%. BEA is considering increasing its debt let 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 12%. BEA has a beta of 0.9. a. What is BEA's unlevered beta? Use market value D/S (which is the same as wa/ws) when unlevering. Round your answer to two decimal places. b. 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. Betal Cost of equity % c. 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. % Wha the total value of the firm with 50% debt? Do not round interm 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. million
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 20P
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Question
Kk.176.
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 $14.307
million, and it faces a 35% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 7%. 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 12%. BEA has a beta of 0.9.
a. What is BEA's unlevered beta? Use market value D/S (which is the same as wa/ws) when unlevering. Round your answer to two decimal places.
b. 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
%
c. 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? 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.
million
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