New beta after deleveraging and cost of equity

Assignment Help Financial Management

Reference no: EM13882808

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 $14.891 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 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 8%. BEA has a beta of 0.9.

(a) What is BEA's unlevered beta before restructuring? Use market value D/S (which is the same as wd/ws) when unlevering. Round your answer to two decimal places.

(b) What are BEA's new beta after deleveraging and cost of equity if it has 30% debt? Round your answers to two decimal places.

(d) What is the total value of the firm with 30 % debt? 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.

Reference no: EM13882808

Questions Cloud

Overhead is applied on the basis of machine hours : Overhead is applied on the basis of machine hours. It takes 3 machine hours to produce a large doll house and 2 machine hours to produce a small doll house. EDHC produces 2,000 large doll houses and 10,000 small doll houses in a year. Total manufactu..

Average salary for ucr graduates : Tuition costs $13,500 for UC Riverside Students. Suppose college lasts four years. Average salary for UCR graduates is $48,700. Average salary of someone who does not finish college is $37,400. Suppose everyone retires at age 65 and everyone leaves h..

Prepare a project on new product development : Prepare a project on New Product Development and in the report following points should be included :Introduction,Purpose,Background,Scope,Methodology,Assumptions,Limitations,Framework,New Product,Development Practices,Key Success Factors in NPD Proce..

Discuss companys operational strategic performance dimension : Discuss the company's operational strategic performance dimensions. Provide general statistics, history, management, headquarters, divisions and all products.

New beta after deleveraging and cost of equity : 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. What is BEA's unlevered be..

The characteristics of revenue, expenditure, or conversion : What characteristics of administrative processes are different from the characteristics of revenue, expenditure, or conversion processes?

Estimate the causal effect of education : Ashenfelter proposed a method to estimate the causal effect of education on income based on the Vietnam draft lottery. The table below shows the average education and annual salary of two groups of men: those born on September 7, 1950, and those born..

New debt and used this to buy back stock : Dye Trucking raised $260 million in new debt and used this to buy back stock. After the recap, Dye's stock price is $7.5. If Dye had 80 million shares of stock before the recap, how many shares does it have after the recap? Enter your answer in milli..

What corporate governance functions are missing at arbol : What corporate governance functions are missing at Arbol? Be specific and describe the facts of the case and their relevance to corporate governance.

User Account

All Pages