Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
Chapter 16, Problem 10P
Optimal Capital Structure with Hamada
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8%, 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 $14,933 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 4%, 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 1.0.
- a. What is BEA’s unlevered beta? Use market value D/S (which is the same as wd/ws when unlevering.
- b. What are BEA’s new beta and
cost of equity if it has 40% debt? - c. What are BEA’s WACC and total value of the firm with 40% debt?
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Optimal Capital Structure with
Hamada
Beckman Engineering and Associates
(BEA) is considering a change in its
capital structure. BEA currently has $20
million in debt carrying a rate of 8%,
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
$18 million, and it faces a 25% federal-
plus-state tax rate. The market risk
premium is 4%, 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 10%. BEA has a beta of 1.2.
a. What is BEA's unlevered beta? Use
market value D/S (which is the same
as wd/ws) when unlevering. Do not
round intermediate calculations.
Round your answer to two decimal
places.
Optimal Capital Structure with Hamada
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of
8%, 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 $14.442 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 6%. BEA
is considering increasing its debt level to a capital structure with 35% 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 8%. BEA has a beta of 1.0.
a. What is BEA's unlevered beta? Use market value D/S (which is the same as wa/w,) when unievering. Round your answer to two decimal places.
0.870
b. What are BEA's new beta and cost of equity if it has 35% debt? Do not…
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying 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 $13.863 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 7%. 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 beta of 0.8
What are BEA’s WACC and total value of the firm with 50% debt? Do not round intermediate calculations. Round your answer to two decimal places. %
What is the total value of the firm with 50% debt? Enter your answers in millions. For example, an answer…
Chapter 16 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 16 - Prob. 1QCh. 16 - Prob. 2QCh. 16 - Prob. 3QCh. 16 - One type of leverage affects both EBIT and EPS....Ch. 16 - Prob. 5QCh. 16 - Prob. 6QCh. 16 - Prob. 7QCh. 16 - Prob. 8QCh. 16 - Prob. 9QCh. 16 - Prob. 1P
Ch. 16 - Unlevered Beta
Counts Accounting’s beta is 1.15...Ch. 16 - Premium for Financial Risk
Ethier Enterprise has...Ch. 16 - Value of Equity after Recapitalization Nichols...Ch. 16 - Stock Price after Recapitalization Lee...Ch. 16 - Prob. 6PCh. 16 - Prob. 7PCh. 16 - Capital Structure Analysis Pettit Printing Company...Ch. 16 - Optimal Capital Structure with Hamada
Beckman...Ch. 16 - WACC and Optimal Capital Structure F. Pierce...Ch. 16 - Prob. 12PCh. 16 - Prob. 1MCCh. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 4MCCh. 16 - Prob. 5MCCh. 16 - Prob. 6MCCh. 16 - What does the empirical evidence say about capital...Ch. 16 - Suppose there is a large probability that L will...Ch. 16 - What is the value of Ls stock for volatilities...
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