Bickley engineering company has a capital structure of 30% debt and

PROBLEM BASED ON CHAPTER 15 – WACC AND THE HAMADA FORMULA

Bickley Engineering Company has a capital structure of 30% Debt and 70% Equity.  Its current Beta is 1.3, and its Market Risk Premium is 7.5% Points.  The current Risk Free Rate is 3.5%.  Bickley’s marginal tax rate is 40%.

What is the Unlevered Beta of Bickley? 

Bickley’s management would like to change its capital structure to 15% Debt and 85% equity by retiring its bonds yielding 8%.  The remaining long term debt will be at 7%.  The marginal tax rate will remain the same. 

What will be Bickley’s  new Beta with this new 15/85 capital structure?

What is the WACC (Weighted Average Cost of Capital) of Bickely with its 30/70 capital structure? Bickley’s average borrowing rate with this capital structure is 7.5%.

What will be Bickley’s WACC with its 15/85 capital structure?

 

PROBLEM  BASED  ON  CHAPTER 26 – MODIGLIANI & MILLER EXTENSION MODELS WITH GROWTH ASSUMPTIONS

Yancey Industries’ Free Cash Flow for the past 12 months is $2.0 Million, and the future expected growth rate of this FCF is 6.5%.   Yancey has no debt in its current capital structure.  Its Cost of Equity is 11.5%.  Its tax rate is 35%.  Calculate  the Unlevered Value of Yancey (Vu).

Calculate  VL  and  rsL  for the scenario whereby Yancey uses $8.0 Million Debt costing 8%. 

Using the Unlevered Value from above calculate  VL  and  rsL by using the M&M Model (with taxes) for Yancey using $8.0 Million Debt costing 8%.

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