(ST–2)

Hamada Equation Lighter Industrial Corporation (LIC) is considering a large-scale recapitalization.

Currently, LIC is financed with 25% debt and 75% equity. LIC is considering increasing its level of debt until it is financed with 60% debt and 40% equity. The beta on its common stock at the current level of debt is 1.5, the risk-free rate is 6%, the market risk premium is 4%, and LIC faces a 40% federal-plus-state tax rate.