1.     (20 points) Change in Capital Structure

 Beckman Engineering and Associates (BEA) is considering a change in its capital structure.  BEA currently has $20 million in debt carrying a rate 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 $12.401 million, and it faces a 30% federal-plus-state tax rate.  The market risk premium is 5%, and the risk-free rate is 4%.  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 10%.  BEA has a current beta of 1.1.

a)     What is the current WACC?

b)    What is BEA's unlevered beta? 

c)     What are BEA's new beta after releveraging and cost of equity if it has 50% debt? 

d)    What is BEA's WACC after releveraging to 50% debt?

e)     What is the value of the firm with 50% debt, assuming zero growth?

f)     Should BEA change its capital structure?