Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 16-10 Optimal Capital Structure with Hamada Beckman Engineering and Associates BEA s considering a change in its capital structure BEA currently has $20 million

image text in transcribed

Problem 16-10 Optimal Capital Structure with Hamada Beckman Engineering and Associates BEA s considering a change in its capital structure BEA currently has $20 million in debt ca yin 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 $12.472 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 6%, and the risk-free rate is 6%. BEA is considering increasing its debt level to a capital structure with 40% 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 9%. BEA has a beta of 0.8 a. What is BEA's unlevered beta before restructuring? 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 after releveraging and cost of equity if it has 40% debt? Round your answers to two decimal places. Beta Cost of equity c. What is BEA's WACC after releveraging? Round your answer to two decimal places. what is the total value of the firm with 40 % debt? 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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Entrepreneurial Finance Venture Capital Deal Structure And Valuation

Authors: Janet Kiholm Smith, Richard L. Smith

2nd Edition

1503603210, 978-1503603219

More Books

Students also viewed these Finance questions

Question

Recognize the features of practical performance appraisal forms

Answered: 1 week ago