Week 2 Assignment: Chapter 15 and 26

Chapter 15
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?

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

Chapter 26
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%.