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Calculating share price and weighted cost of capital

Beckman Engineering and Associates (BEA) has 25 million shares outstanding. Shares are trading at $8.00. BEA management plans to raise $60 million to by issuing debt to repurchase shares. Suppose that BEA is an all equity firm before the debt issue, it is subject to 36% corporate tax rate, its cost of debt is 5% and equity cost of capital is 10%.

a. What is the BEA's market value of assets (including any tax shields) just after the debt is issued, but before the shares are repurchased?

b. What is BEA's share price just before the share repurchase?

c. How many shares will BEA repurchase?

d. What are the BEA's share price after the share repurchase?

e. What is the BEA's pretax weighted cost of capital after the share repurchase?

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Solution:

a. What is the BEA's market value of assets (including any tax shields) just after the debt is issued, but before the shares are repurchased?

Value of the firm after debt issue but before repurchase = Value of all equity firm + Value of tax shield + Value of debt
=25 million * $8.00 + 60 million*36% + 60 million=$281.6 million

b. What is BEA's ...

Solution Summary

Solution describes the steps to calculate Company's market value of assets, share price after and before repurchase & weighted cost of capital after repurchase.

$2.19