Question

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.

Answer 1

Beckman Engineering and Associates (BEA) is contemplating changing its capital structure by increasing its debt level to 30% based on market values. This change involves retiring the old debt and issuing new debt with an 8% interest rate. BEA is a zero-growth firm that pays out all of its earnings as dividends.

Step-by-step explanation:

Beckman Engineering and Associates (BEA) and its Capital Structure

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. Currently, BEA has $20 million in debt with a 7% interest rate, and the stock price is $40 per share with 2 million shares outstanding. BEA is a zero-growth firm that 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.

BEA is considering increasing its debt level to a capital structure with 30% debt, based on market values. It plans to repurchase shares with the extra money borrowed. To issue new debt, the old debt will need to be retired, and the new debt will have an interest rate of 8%. BEA has a beta of 0.9.