Problem 15 10 Optimal Capital Structure Hamada Beckman Engineering Associates Bea Consider Q29456802

Problem15-10
Optimal Capital Structure with Hamada

Beckman Engineeringand Associates (BEA) is considering a change in its capitalstructure. BEA currently has $20 million in debt carrying a rate of8%, and its stock price is $40 per share with 2 million sharesoutstanding. BEA is a zero growth firm and pays out all of itsearnings as dividends. The firm’s EBIT is $15.324 million, and itfaces a 40% federal-plus-state tax rate. The market risk premium is5%, and the risk-free rate is 5%. BEA is considering increasing itsdebt level to a capital structure with 45% debt, based on marketvalues, and repurchasing shares with the extra money that itborrows. BEA will have to retire the old debt in order to issue newdebt, and the rate on the new debt will be 9%. BEA has a beta of0.9.

What is BEA’s unlevered beta? Use market value D/S (which is thesame as wd/ws) when unlevering. Round youranswer to two decimal places.

What are BEA’s new beta and cost of equity if it has 45% debt?Do not round intermediate calculations. Round your answers to twodecimal places.

BetaCost of equity%

What are BEA’s WACC and total value of the firm with 45% debt?Do not round intermediate calculations. Round your answer to twodecimal places.
%

What is the total value of the firm with 45% debt? Do not roundintermediate calculations. Enter your answer in millions. Forexample, an answer of $1.2 million should be entered as 1.2, not1,200,000. Round your answer to three decimal places.
$ million

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