Reference no: EM13333399

Note 1: It is best to not round intermediate and earlier answers when using data from these steps/prior answers for later questions. You could perform the problem with a spreadsheet and then intermediate steps could be referred to in later steps and all intermediate steps will not be rounded. I set the grading up so that different answers will be graded as correct using various rounding conventions, but it is still best to not round earlier steps/answers if using data for later answers. If you believe your answer is right but was marked wrong on the first try because of rounding, contact us and we will check your work/answer before your second attempt. We can also check the final attempt and change your score if there is just a rounding issue. Remember, people have different data so it will take us a little bit (we will work as fast as possible) to rework the problem and check your answer. If possible, please send us your calculations and please send your data.

Note 2: To determine the value in the last question you need to know the steady cash flows of this zero growth firm (i.e. NOPAT) and divide this amount by the discount rate (WACC). We computed the present value of a steady stream of cash flows a couple times during our class discussions.

Note 3: Remember, stock price times # of shares equals equity market value.

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 $14.095 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 5%. 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 11%. BEA has a beta of 0.9.

What is BEA's unlevered beta before restructuring? Use market value D/S (which is the same as wd/ws) when unlevering.

What are BEA's new beta after releveraging and cost of equity if it has 40% debt?

What is BEA's WACC after releveraging?

What is its total value of the firm with 40 % debt?