Optimal Capital Structure with Hamada
Beckman Engineering and Associates (BEA) is considering a changein its capital structure. BEA currently has $20 million in debtcarrying a rate of 7%, and its stock price is $40 per share with 2million shares outstanding. BEA is a zero growth firm and pays outall of its earnings as dividends. The firm's EBIT is $14.386million, and it faces a 40% federal-plus-state tax rate. The marketrisk premium is 6%, and the risk-free rate is 4%. BEA isconsidering increasing its debt level to a capital structure with30% debt, based on market values, and repurchasing shares with theextra money that it borrows. BEA will have to retire the old debtin order to issue new debt, and the rate on the new debt will be8%. BEA has a beta of 1.0.
What is the total value of the firm with 30% debt? Enter youranswers in millions. For example, an answer of $10,550,000 shouldbe entered as 10.55. Do not round intermediate calculations. Roundyour answer to three decimal places.
$ million
- What is BEA's unlevered beta? Use market value D/S (which isthe same as wd/ws) when unlevering. Do notround intermediate calculations. Round your answer to two decimalplaces.
- What are BEA's new beta and cost of equity if it has 30% debt?Do not round intermediate calculations. Round your answers to twodecimal places.
Beta:
Cost of equity: % - What are BEA’s WACC and total value of the firm with 30% debt?Do not round intermediate calculations. Round your answer to twodecimal places.
%
