Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 7%, 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 $14.156 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 7%. BEA is considering increasing its debt level to a capital structure with 30% 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 12%. 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. Round your answer to two decimal places. 1.04 b. What are BEA's new beta and cost of equity if it has 30% debt? Do not round intermediate calculations. Round your answers to two decimal places. Beta 1.31 Cost of equity 11.5 % c. What are BEA's WACC and total value of the firm with 30% debt? Do not round intermediate calculations. Round your answer to two decimal places. 10.2 % What is the total value of the firm with 30% debt? Do not round intermediate calculations. 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. $ 82.8 million Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 7%, 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 $14.156 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 7%. BEA is considering increasing its debt level to a capital structure with 30% 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 12%. 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. Round your answer to two decimal places. 1.04 b. What are BEA's new beta and cost of equity if it has 30% debt? Do not round intermediate calculations. Round your answers to two decimal places. Beta 1.31 Cost of equity 11.5 % c. What are BEA's WACC and total value of the firm with 30% debt? Do not round intermediate calculations. Round your answer to two decimal places. 10.2 % What is the total value of the firm with 30% debt? Do not round intermediate calculations. 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. $ 82.8 million
Expert Answer:
Answer rating: 100% (QA)
To solve this problem well use the Hamada equation to calculate the unlevered beta and then use the ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
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...
-
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...
-
Describe the Economic Analysis of the Valero Energy Corporation. Demonstrate Valero Energy Corporation is susceptible to Macroeconomic outlook both in the U.S.& foreign markets
-
The balance sheet of Augen Vision Ltd. at December 31, 2016, reported the following shareholders' equity: Common shares, 200,000 shares authorized, 50,000 shares issued and outstanding...
-
Compute by DMDs the area in hectares within a closed-polygon traverse ABCDEFA by placing the X and Y axes through the most southerly and most westerly stations, respectively. Departures and latitudes...
-
Jerome M. Eisenberg is an antiquities dealer and a self-proclaimed expert in classical antiquities with a doctorate in Roman, Egyptian, and Near Eastern art. Maurice E. Hall Jr. is an art dealer who...
-
The Edelman Gem Company, a small jewelry manufacturer, has been successful and has enjoyed a good growth trend. Now Edelman is planning to go public with an issue of common stock , and it faces the...
-
How would a data analyst evaluate a conference call to get a feel for the sentiment of management?
-
Cody Jenkins and Lacey Tanner formed a partnership to provide landscaping services. Jenkins and Tanner shared profits and losses equally. After all the tangible assets have been adjusted to current...
-
Rundle Services Company has 51 employees, 31 of whom are assigned to Division A and 20 to Division B Rundle incurred $311,100 of fringe benefits cost during year 2 Required Determine the amount of...
-
In the new product development (NPD) stage-gate process, NPD teams make critical decisions at the end of a given stage (i.e., a gate). The people that make stage-gate "go" or "no-go" decisions for a...
-
PDQ, Inc., expects EBIT to be approximately $14.3 million per year for the foreseeable future, and it has 50,000 20-year, 10 percent annual coupon bonds outstanding. (Use Table 11.1) What would the...
-
1. a. What is the control sequence for execution of the instruction Add R1, R2 including the instruction fetch phase? (Assume single bus architecture) 2. b. Table with microinstructions a. What is...
-
7 amplification strategies for health and wellness blog post optimization and promotion
-
2) In Figure, mass m, = 1 kg with a velocity v 15 m/s moving in x direction makes elastic collision with m, 5 kg that is initially at rest. = (a) Find the velocity of m, after the collision. (b) Find...
-
People are buying orange service dog vests or backpacks online, and disguising their dog to look like a service animal so that their pet can accompany them to restaurants, stores, theaters, airplanes...
-
Explain the regulation of the secretions of the small intestine.
-
Prove Theorem 4.22(e).
-
Find the inverse of the given matrix (if it exists) using Theorem 3.8. [1/V2 -1/V2] L1/V2
-
Solve the equation for X, given that A = and B = 2(A - B + 2X) 3(X - B) 3 4 -1
-
The direct result of the process of transcription is the synthesis of a. DNA. b. RNA. c. a polypeptide. d. all of the above.
-
Many hotel jobs are inherently dead end; for example, maids, laundry workers, and valets, either have no great aspirations to move up, or are just using these jobs temporarily, for instance, to help...
-
Using what you learned in this chapter of Dessler Human Resource Management, build on the companys new system by recommending two more specific career development activities the hotel should...
Study smarter with the SolutionInn App