Question: Show all your work. Problems is worth 10 points. Safety Systems owns and operates a fire extinguisher manufacturing firm. The firm currently has $50 million

Show all your work. Problems is worth 10 points.

Safety Systems owns and operates a fire extinguisher manufacturing firm. The firm currently has $50 million in debt and $100 million in equity outstanding. Its stock has a beta of 1.2. The firm is planning a leveraged buyout, where it will increase its debt to equity ratio to .80. The tax rate is 25%. A) What is the unlevered beta of the firm? Explain your answer in words. B) What will be the new beta after the leverage buyout? Explain your answer in words. C) Explain the likely effect on both the component cost of equity capital and the firms overall weighted average cost of capital. Why would a firm pursue such a strategy?

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