Please see problems attached. Please put answers in EXCEL separate tabs. Thank you in advance. Problems Complete the following problems from Chapters 7, 14, and 15

Chapter I5

(r.s-10)

Optimal Capital Structure w'ith Hamada

(1s-11)

WACC and Optimal Capital Stil.rcture

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Capital Stmcture Decisions

to30o/o.If it decides t<: increase its use r.rf leverage, it must call its old bonds and issue ner,v ones urith a 1270 coupon. If it decides to decrease its ieverage, it witl cali its old bonds and replace them with nerv 8% coupon bonds. The companv will sell or repurclrase stock at the nerv equilibrium price to complete the capital str.ucture change.

The finn pa,ys out all earnings as dividends; hence its stock is a z-ero-growth stock. Its current cost of equity, r., is 149/o. If it increases ieverage, r. .i,r,ill be 16yo. if it decreases Ieverage, r. lvill be l3%. What is the firm's WACC and totai corporate r.alue under each capital structure?

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA cr-rrrently has $20 miliion in debt carrying a rate of 87o, and its stock price is $;40 per share i,r,'ith 2 million shares outstanding. BEA is a zero,growth firm and prirys out all of its earnings as dlvidends. llhe firm's EBIT is $14.933 rnillion, and it faces a 40% federai-plus-state tax rate. The market risk premium is 49lo, ancl the risk-free rate is 67o. BEA is consiclering increasing its debt level to a capital structure with 40% debt, based on urarket values, and repurchasing shares with the extra money that it borrows. tlEA will have to retire the o1d debt iir order to issue new debt. and tl're rate on the new debt will be 9ol'. BEA has a beta of 1.0.

a. \Vhat is BEA's unlevered beta? Use market value D/S (ivhich is the same as w.1/rv_) lvhen unlevering.

b. What are IIEA's ne'\, beta and cost of equitv if it has 40Zo debt?

c. What are BEA's WACC and totai value of the firm with 40% debt?

F. Pierce Products Inc. is considering changing its capital structure. Ir. Pierce curreutly has no debt and no preferred stock, Lrut it r,vould like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structrlres would be as follorvs:

Market Debt-to- Market Equity-to- Market Debt-to- Value Hatio {w6} Value Ratio {w"} Equity Ratio {D/S)

Before-Tax Cost

of Debt {16}

0.0

4.2

{}.4

().6

0.8

1.0

0.8

0.6

0.4

0.2

0.00

0.25

4.67

1.50

4.00

6.00/o

7.4

8.0

9.t)

r0.0

F. Pierce uses the CAPM to estimate its cost of conrmon equity, r" and at the time of the analvsis the risk-fi'ee rate is 59u6, the market risk premium is 6%, and the company's tax rate is 40%. F'. Pierce estimates that its beta norv (which is "unlevered" because it currently has no debt) is 0.8. Based on this information, what is the tlrm's optimal capital structure, and what lvouid be the weighted average cost ofcapital at the optinial capital structure?

{1_q":.2}

Build a Model: WACC and Optimal CapitalStructure

Start with the partial model in the lile Ch15 P12 Buitd a Model.xls on the textbook's Wetr site. Reacher Technologv- has consulted with investrnent bankers and determined the in{erest rate it rvor.tld pay for different capital structures, as shown in the foilowing table. l)ata for the risk-free rate, the market rlsk premium, an estimate of Reacher's unlevered beta, and the tax rate are also sholvn. Based on this inlbrmation. what is the firm's optimal capitai structure, and what is the weighted average cost ofcapital at the optintal structure?