EMC, Brooks Enterprise, Beckman Engineering

Problem 15-2 (Value of operation of constant growth firm)

EMC Corporation has never paid a dividend. Its current free cash flow is $400,000 and is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC =12%. Calculate EMC's value of operations.

Problem 15-6 (Value of operations)

Brooks Enterprise has never paid a dividend. Free cash flow is projected to be $80,l000 and $100,000 for the next 2 years, respectively, and after the second year it is expected to grow at a constant rate of 8%. The company's weighted average cost of capital is WACC = 12%.

A- What is the terminal, or horizontal, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.)
B- Calculate the value of Brook's operations.

Problem 16-11 (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 8%, and its stock price is $40 per share with 2 millions shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. EBIT is $14,933 millions, and BEA faces a 40% debt, federal plus-rate-tax rate. The market risk premium is 4%, and the risk-free rate is 6%. BEA is considering increasing its debt level to a capital structure with 40% 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 1.0.

A- What is BEA's unlevered beta? Use market value D/S when unlevering.
B- What are BEA's new beta and cost of equity if it has 40% debt?
C- What are BEA's WACC and total value of the firm with 40% debt?.