Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8 percent, 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. EBIT is $14.933 million, and BEA faces a 40 percent federal-plus-state tax rate. The market risk premium is 4 percent, and the risk-free rate is 6 percent. BEA is considering increasing its debt level to a capital structure with 40 percent 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 9 percent. BEA has a beta of 1.0. a. What is BEA’s unlevered beta? Use market value D/S when unlevering. b. What are BEA’s new beta and cost of equity if it has 40 percent debt? c. What are BEA’s WACC and total value of the firm with 40 percent debt?

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8 percent, 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. EBIT is $14.933 million, and BEA faces a 40 percent federal-plus-state tax rate. The market risk premium is 4 percent, and the risk-free rate is 6 percent. BEA is considering increasing its debt level to a capital structure with 40 percent 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 9 percent. BEA has a beta of 1.0. a. What is BEA’s unlevered beta? Use market value D/S when unlevering. b. What are BEA’s new beta and cost of equity if it has 40 percent debt? c. What are BEA’s WACC and total value of the firm with 40 percent debt?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 24P

See similar textbooks

Similar questions

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 6%, 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 $13.863 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 7%. BEA is considering increasing its debt level to a capital structure with 50% 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 10%. BEA has a beta of 0.8 What are BEA’s WACC and total value of the firm with 50% debt? Do not round intermediate calculations. Round your answer to two decimal places. % What is the total value of the firm with 50% debt? Enter your answers in millions. For example, an answer…
Beckman Engineering and Associates (BEA) is considering a change in its capital structure BEA currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 millions shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. EBIT is $14,933 millions, and BEA faces a 40% debt, federal plus-rate-tax rate. The market risk premium is 4%, and the risk-free rate is 6%. 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 9%. BEA has a beta of 1.0.A- What is BEA's unlevered beta? Use market value D/S when unlevering.B- What are BEA's new beta and cost of equity if it has 40% debt?C- What are BEA's WACC and total value of the firm with 40% debt?.
In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. Using the WACC, the expected return for AMC equity is 25.71%. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow using the FTE method? (Hold all intermediate calculations to at least 6 decimal places and round to the…
In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. a. If AMC were an all-equity (unlevered) firm, what would its market value be? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 2.7% per year, at what rate are its interest payments expected…
In year 1, AMC will earn $2,200 before interest and taxes. The market expects these earnings to grow at a rate of 3.3% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 25%. Right now, the firm has $5,500 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 3.3% per year. Suppose the risk-free rate equals 5.5%, and the expected return on the market equals 12.1%. The asset beta for this industry is 1.41. a. If AMC were an all-equity (unlevered) firm, what would its market value be? b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 3.3% per year, at what rate are its interest payments expected to grow? c. Even though AMC's debt is riskless (the firm will not default), the future growth of AMC's debt is…
Nelco Inc. has decided in favour of a capital structuring that involvesincreasing its existing $80 million in debt to $125 million. The interestrate on debt is 9% and is not expected to change. The firm currently has 10million shares outstanding and the price per share is $45. If therestructuring is expected to increase the ROE, what is the minimum level ofEBIT that Nelco’s management must be expecting. Ignore taxes in your answer.
Horizon Corporation has decided to a capital restructuring. This process of restructuring involves increasing its existing $80 million in debt to $125 million. However, the interest rate on the debt is 9 percent and it is not expected to change. The firm currently has 10 million shares outstanding, and the price per share is $60. If the restructuring is expected to increasethe return on equity (ROE), what is the minimum level for EBIT that Horizon’s management must be expecting? Ignore taxes in your answer.
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $2.7 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.26 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm currently has $3.1 million worth of debt outstanding. The cost of this debt is 8 percent per year. The firm expects to have an EBIT of $1.3 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
Southern Timber Company expects to have an EBIT of $10 million in the coming year, and its EBIT is expected to grow at a rate of 4% after that. Southern Timber is currently an unlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel of professional financial experts indicates that the company can enjoy a tax shield benefit of $35 million in firm value if the company changes its capital structure by allowing a certain amount of debt. What would be the value of Southern Timber Company if it decides to undertake the capital structure suggested by these financial experts? O 385 O 380 O 375 О 370 оооо
Tool Manufacturing has an expected EBIT of $ 69,000 in perpetuity and a tax rate of 23 percent. The firm has $200,000 in outstanding debt at an interest rate of 4.5 percent, and its unlevered cost of capital is 10.4 percent. What is the value of the firm according to M&M Proposition I with taxes?
Widgets Inc has an expected EBIT of $64,000 in perpetuity and a tax rate of 35 percent. The firm has$95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15percent. What is the value of the firm according to M&M Proposition I with taxes? Should the companychange its debt–equity ratio if the goal is to maximize the value of the firm? Explain.