Question: Flex Logic System (FLS) is considering a change in its capital structure. FLS currently has $20 million in debt carrying a rate of 8%, and

Flex Logic System (FLS) is considering a change in its capital structure. FLS currently has $20 million in debt carrying a rate of 8%, and its stock price is $20 per share with 4 million shares outstanding. FLS is a zero-growth firm and pays out all of its earnings as dividends.

EBIT is $15.262 million, and FLS has a 30% tax rate. The market risk premium is 4%, and the risk-free rate is 5%. FLS 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. FLS will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 9.5%. FLS has a beta of 1.2.

a. What is FLS's unlevered beta? Use market value D/S when unlevering.

b. What are FLS's new beta and cost of equity if it has 50% debt?

c. What are FLS's WACC and total value of the firm with 50% debt?

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