Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its capital...

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Optimal Capital Structure with Hamada
Beckman Engineering and Associates (BEA) is considering a changein its capital structure. BEA currently has $20 million in debtcarrying a rate of 8%, and its stock price is $40 per share with 2million shares outstanding. BEA is a zero growth firm and pays outall of its earnings as dividends. The firm's EBIT is $14.131million, and it faces a 30% federal-plus-state tax rate. The marketrisk premium is 6%, and the risk-free rate is 5%. BEA isconsidering increasing its debt level to a capital structure with45% debt, based on market values, and repurchasing shares with theextra money that it borrows. BEA will have to retire the old debtin order to issue new debt, and the rate on the new debt will be12%. BEA has a beta of 1.2.
What is BEA's unlevered beta before restructuring? Use marketvalue D/S (which is the same as w_d/w_s) whenunlevering. Round your answer to two decimal places.

What are BEA's new beta after releveraging and cost of equityif it has 45% debt? Round your answers to two decimal places.
Beta
Cost of equity   %

What is BEA's WACC after releveraging? Round your answer to twodecimal places.
  %

What is the total value of the firm with 45 % debt? Enter youranswer in millions. For example, an answer of $1.2 million shouldbe entered as 1.2, not 1,200,000. Round your answer to threedecimal places.
$    million

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4.4 Ratings (591 Votes)

a Total current debt D 20 million Total Equity E no of shares x price per share 2 million share x 40 per share 80 million DebtTotal Equity DE 20miilion 80 million 025 Current Beta Current Levered Beta 12 Tax rate 30 Unlevered Beta before restructuring Levered Beta 1 DE1tax rate 12 1 025130 12 1 025 x 70 12 1 0175 12 1175 10212 102 rounded to two decimal See Answer

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Optimal Capital Structure with HamadaBeckman Engineering and Associates (BEA) is considering a changein its capital structure. BEA currently has $20 million in debtcarrying a rate of 8%, and its stock price is $40 per share with 2million shares outstanding. BEA is a zero growth firm and pays outall of its earnings as dividends. The firm's EBIT is $14.131million, and it faces a 30% federal-plus-state tax rate. The marketrisk premium is 6%, and the risk-free rate is 5%. BEA isconsidering increasing its debt level to a capital structure with45% debt, based on market values, and repurchasing shares with theextra money that it borrows. BEA will have to retire the old debtin order to issue new debt, and the rate on the new debt will be12%. BEA has a beta of 1.2.What is BEA's unlevered beta before restructuring? Use marketvalue D/S (which is the same as wd/ws) whenunlevering. Round your answer to two decimal places. What are BEA's new beta after releveraging and cost of equityif it has 45% debt? Round your answers to two decimal places.BetaCost of equity %What is BEA's WACC after releveraging? Round your answer to twodecimal places. %What is the total value of the firm with 45 % debt? Enter youranswer in millions. For example, an answer of $1.2 million shouldbe entered as 1.2, not 1,200,000. Round your answer to threedecimal places.$ million