XYZ, Inc is considering a change in its operating structure. Specifically, the firm is considering the use of robotic machinery to cut its labor and other variable costs. The engineers for XYZ have come up with the following: Operating Plan A B C Variable Cost per unit $8 $7 $6 Fixed Cost $200,000 $350,000 $700,000 Plan A: XYZs current operating structure Plan B: moderate use of robotic machinery Plan C: extensive use of robotic machinery XYZ is in a competitive market where the price of its product is currently $10/unit. This is not expected to change as a result of any change in operating structure at XYZ.

a. Compute the Break-even Quantity and Sales for each operating plan.

b. Complete the table below: Expected Units Sold (Q) EBIT A B C 100,000 200,000 300,000 400,000 500,000

c. Identify the optimal operating plan for each of the five specified levels of unit sales

d. Which of the operating structures is the riskiest? Which is the least risky?

2. Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million of debt at a pre-tax rate of 8%, and 2 million shares of stock at a current market price of $40 per share, giving it a capital structure of 20% debt and 80% equity. BEA is a zero-growth firm that pays out all of its earnings as dividends (For such firms, FCF = EBIT(1-T) because growth=0%, causing net investment=0). BEAs current EBIT is $14.933 million, and its tax rate is 40%. The market or equity risk premium is 4%, and the risk free rate is 6%. BEA is considering increasing its debt to 60% of its capital structure, based on market values. If BEA changes its capital structure, then the extra debt will be used to repurchase stock. Also, if BEAs capital structure is changed, then BEA will face a pre-tax rate of 9.5% on all of its debt. BEAs levered beta under its current capital structure is 1.00.

a. Compute BEAs cost of equity, wacc, and firm value under its current capital structure.

b. Compute BEAs unlevered beta.

c. Compute BEAs levered beta and cost of equity for its proposed capital structure.

d. Compute BEAs wacc and firm value under its proposed capital structure.