Question

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has...

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 $13.516 million, and it faces a 30% 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 1.1.

  1. What is BEA's unlevered beta? Use market value D/S (which is the same as wd/ws) when unlevering. Round your answer to two decimal places.

  2. 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 %

  3. 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.
    %

    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.
    $ million

Homework Answers

Answer #1

Answer :

a) ßU = ßL / [ (1 + ( 1 - T ) ( D / E ) ]

= 1.1 / [ 1 + ( 1 - 0.30 ) ( 20 / 80 ) ]

= 0.94

Therefore, the unlevered beta is 0.94

b) ßL = ßU [ ( 1 + ( 1 - T ) ( D / E ) ]

At 35% debt, ßL = 0.94 [ 1 + 0.70 ( 35 / 65 ) ]

ßL = 1.29

Hence the new beta is 1.29

rs = Rrf + ßL ( Rm - Rrf )

= 5% + 1.29 (4%)

= 10.16%

Hence, the cost of equity is 10.16%

c) WACC = Wd * rd (1 - t ) + We * rs

WACC = 0.35 * 8% ( 1 - 0.30 ) + 0.65 ( 10.16% )

WACC = 8.56%

Hence, the WACC is 8.56%

Value of the firm is calculated as follows:

V = EBIT( 1 - T ) / WACC

= 13.516 ( 1 - 0.30 ) / 8.56%

= $ 110.528 million

Therefore, the value of the firm is $ 110.528 million.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has...
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 $15.459 million, and it faces a 35% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 6%. BEA...
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has...
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 $14.696 million, and it faces a 35% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 5%. BEA...
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has...
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 6%, 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 $15.654 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 6%, and the risk-free rate is 4%. BEA...
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has...
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 $13.013 million, and it faces a 35% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 6%. BEA...
Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its...
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 6%, 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 $15.140 million, and it faces a 35% federal-plus-state tax rate. The market risk premium is 5%, and the...
Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its...
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 6%, 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 $13.257 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 6%, and the...
Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its...
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 6%, 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 $13.257 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 6%, and the...
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has...
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 $13.558 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 6%. BEA...
Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its...
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 6%, 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 $14.959 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 5%, and the...
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has...
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 6%, 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 $17 million, and it faces a 25% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 7%. BEA is...