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Optimal Capital Structure with Hamada 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 $12.113 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 5%. BEA is considering increasing its debt level to a capital structure with 45% 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 0.9.
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.
What are BEA's new beta after releveraging and cost of equity if it has 45% debt? Round your answers to two decimal places. Beta Cost of equity % What is BEA's WACC after releveraging? Round your answer to two decimal places. %
What is the total value of the firm with 45 % 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. $ million.
You invested $10,000 10 years ago into Fly-By-Night Fund which has reported performance (average annual total return) of 11% over this 10-year period. The front end load of 3%, an expense ratio of 2% was charged. What would your ending wealth positio..
Consider two mutual funds, A and B. The beta for fund A is .60, and the standard deviation of the rate of return = .20. The beta for fund B. is 1.30 and its standard deviation of the rate of return = .325. The standard deviation of the market portfol..
Avicorp has $14.2 million debt issue outstanding, with a 6.1% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 93% of par value. What is Avicorp’s pre-t..
Define the 7 types of profit sharing plans: Profit Sharing Plans, Stock Bonus Plans, Employee Stock Ownership Plans, 401K Plans, Thrift Plans, Age Based Profit Sharing Plans, New Comparability Plans
Continuing from question 6, the standard deviation of stock A is 15%, while the standard deviation of stock B is 12%. If the two stocks have a correlation of -0.5, what is the standard deviation of the portfolio? How does this portfolio standard devi..
You plan to open a retirement account. Your employer will match 50% of your deposits up to a limit on the match of $2, 500 per year. You believe the retirement account will earn 12 % per year over the next 30 years. You will make 30 deposits of $5,00..
Explain to the Sampsons why there is a trade-off when investing in bank CDs versus stock to support their children's future college education.
What types of risks should shareholder wealth-maximizing managers seek to offset in a firm they are managing? Why? How can patents, copyrights, and legal challenges be used to manage business risk?
You have been asked to estimate the value of General Communications, a telecomm firm. General Communications has a debt to capital ratio of 30%, a beta of 1.10 and a pre-tax cost of debt of 7.5%. Assuming that the firm is in stable growth, and that t..
Duration of the need, Concern about the financial viability of the current insurer, Capacity of the policyholder to fund premiums, Cost of the premium compared to alternatives
Calculate the present value of $100 in 3 years using 6.8% interest rate with continuous compounding. Suppose the futures price becomes $1,523 next month and he sells to close the futures. Calculate the rate of return in percentage up to 2 decimal poi..
Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2%. If ..
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