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fm16 8 - 16-11 a BEA’s unlevered beta is b U...

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Answers and Solutions: 16 - 8 16-10 a. Present situation (50% debt): WACC = w d r d (1-T) + w ce r s = (0.5)(10%)(1-0.15) + (0.5)(14%) = 11.25%. V = 1125 . 0 ) 15 . 0 1 )( 24 . 13 ($ WACC ) T 1 )( EBIT ( WACC FCF = = = $100 million. 70 percent debt: WACC = w d r d (1-T) + w ce r s = (0.7)(12%)(1-0.15) + (0.3)(16%) = 11.94%. V = 1194 . 0 ) 15 . 0 1 )( 24 . 13 ($ WACC ) T 1 )( EBIT ( WACC FCF = = = $94.255 million. 30 percent debt: WACC = w d r d (1-T) + w ce r s = (0.3)(8%)(1-0.15) + (0.7)(13%) = 11.14%. V = 1114 . 0 ) 15 . 0 1 )( 24 . 13 ($ WACC ) T 1 )( EBIT ( WACC FCF = = = $101.023 million.
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Unformatted text preview: 16-11 a. BEA’s unlevered beta is b U =b/(1+ (1-T)(D/S))=1.0/(1+(1-0.40)(20/80)) = 0.870. b. b = b U (1 + (1-T)(D/S)). At 40 percent debt: b L = 0.87 (1 + 0.6(40%/60%)) = 1.218. r S = 6 + 1.218(4) = 10.872% c. WACC = w d r d (1-T) + w ce r s = (0.4)(9%)(1-0.4) + (0.6)(10.872%) = 8.683%. V = 08683 . ) 4 . 1 )( 933 . 14 ($ WACC ) T 1 )( EBIT ( WACC FCF − = − = = $103.188 million....
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