Question: Can I get help solving these? 1) Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $25 million
Can I get help solving these?
1) Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $25 million in debt carrying a rate of 6%, and its stock price is $30 per share with 1.5 million shares outstanding. BEA is a zero-growth firm and pays out all of its earnings as dividends. The firm's EBIT is $15.00 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 1.2. What is BEA's unlevered beta
2) Schweser Satellites Inc. produces satellite earth stations that sell for $250,000 each. The firm's fixed costs, F, are $3 million, 30 earth stations are produced and sold each year, profits total $1,000,000, and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $2 million to investment and $800,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $15,000 and (2) increase output by 30 units, but (3) the sales price on all units will have to be lowered to $200,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 12%, and it uses no debt. What is the incremental profit?
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