Group 4:

● Anissa Dian Setyarani Wokas (20/470892/PEK/26619)

● Firza Syafira (20/470938/PEK/26665)
● Puspita Ramadhania (20/471001/PEK/26728)
● Raveena Fiarani (20/471005/PEK/26732)

Assignment 7

15-6 Dye Trucking raised $150 million in new debt and used this to buy back stock.
After the recap, Dye’s stock price is $7.50. If Dye had 60 million shares of stock
before the recap, how many shares does it have after the recap?

The number of shares after recapitalization of Dye Trucking can be found by

subtracting the number of shares before the recapitalization to the number of shares that
are bought back by Dye Trucking using the newly raised debt at the price of the stock
before the recap. The calculation is given below:

(DN ew −DOld )
npost = nP rior − P P rior

150million
= 60million − 7.5

= 40million shares of stock

15-8 The Rivoli Company has no debt outstanding, and its financial position is given by
the following data:

Assets (book = market) $3,000,000

EBIT $ 500,000
Cost of equity, rs 10%
Stock price, P0 $ 15
Shares outstanding, n0 200,000
Tax rate, T (federal-plus-state) 40%

The firm is considering selling bonds and simultaneously repurchasing some of its
stock. If it moves to a capital structure with 30% debt based on market values, its
cost of equity, rs, will increase to 11% to reflect the increased risk. Bonds can be
sold at a cost, rd, of 7%. Rivoli is a no-growth firm. Hence, all its earnings are
paid out as dividends. Earnings are expected to be constant over time.
A. What effect would this use of leverage have on the value of the firm?

Original value from the firm (D = $)

V =D+S

= 0 + ($15) (200,000)

= $3,000,000

Original cost of capital:

WACC = wd rd (1 − T ) + wc rs

= 0 + (1.0)(10%)

= 10%

With financial leverage ( wd = 30%) :

WACC = wd rd (1 − T ) + wc rs

= (0.3) (7%) (1-0.40) + (0.7) (11%)

= 8.96%

Because the the growth is zero, the value of the company is:

F CF
V = W ACC

(EBIT )(1−T )
= W ACC

($500,000) (1−0.40)
= 0.0896

= $3,348,214

Increasing the financial leverage by $900,000 of debt resulted in an increase in

the firm’s value from $3,000,000 to $3,348,214.

B. What would be the price of Rivoli’s stock?

Using its target capital structure of 30% debt, the company is surely have a debt
of:
 D = wd .V

= 0.30 ($3,348,214)

= $1,004,464

Debt value of equity:

S= V - D

= $2,343,750

New price per share:

[S + (D − D0 ]
P= n0

[$2,343,750 + ($1,004,464 − 0)]

= 200,000

= $16.741

C. What happens to the firm’s earnings per share after the recapitalization?

Calculate EPS before leverage:

Calculate the number of shares repurchases:

 Calculate the interest on debt:

Firm’s earnings per share will be increased after recapitalization to $1.84 from
$1.5 before recapitalization.

D. The $500,000 EBIT given previously is actually the expected value from the
following probability distribution:

Probability EBIT
0.10 ($ 100,000)
0.20 200,000
0.40 500,000
0.20 800,000
0.10 1,100,000

Determine the times-interest-earned ratio for each probability. What is the

probability of not covering the interest payment at the 30% debt level?
 The probability of not covering the TIE is when the ratio is less than 1. The ratio is less
than 1 when the probability is 10%. Therefore, the probability of not covering the TIE is
at 10% probability for 30% of debt.

15-10 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 million shares outstanding. BEA is a
zero-growth firm and pays out all of its earnings as dividends. The firm’s EBIT is
$14.933 million, and it faces a 40% federal-plus-state 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 (which is the same as wd
ws) when unlevering.

BEA’s market value of equity can be calculated by timing the current price of stock
per share of $40 to the total of shares outstanding of 2 million. The calculations is
as follows:

S =P ×n

= 40 × 2million
 = 80million

After we know the market value of the company, we can calculate its total value by
adding the market value to the amount of debt the company has.

V =D+S

= 20million + 80million

= 100million

From the total value, we can generate the percent of debt and equity used to
finance the company.

D
wd = V

20million
= 100million

= 20%

S
ws = V

80million
= 100million

= 80%

Finally, after yielding the ratio of debt and equity to the capital, the unlevered beta
can be found using Hamada’s formula as follows:

bU = b/[1 + (1 − T )(wd /ws )]

= 1.0/[ 1 + (1 − 40%) (20% / 80%) ]

= 0.87

B. What is BEA’s new beta and cost of equity if it has 40% debt?

b = bU [1 + (1 − T )(wd /ws )]
= 0.87[1 + (1 − 40%)(40%/60%)]
= 1.22

rs = rRF + RP M (bnew )
 = 6% + 4%(1.22)
= 10.87%

C. What are BEA’s WACC and total value of the firm with 40% debt?

The value of BEA’s WACC will be changed after it goes through a change of
capital structure to 40% debt ratio. The new WACC can be generated using the
equation below.

W ACC = wd rd (1 − T ) + ws rs
= 40% (9%)(1 − 40%) + 60%(10.87%)
= 8.68%

The value of operation can be found using the constant growth formula, but since
the FCF is not given, we have to calculate the FCF first. And because BEA’s
growth rate is 0%, BEA has no required investments in capital. Therefore, its FCF
will be equal to its NOPAT. The calculation of the FCF is as following:

F CF = E BIT (1 − T )
= 14.933million (1 − 40%)
= 8.959 million

After we generate the FCF, BEA’s Value of operation can be calculated as the
following:

F CF (1+g)
V op = W ACC −g
8.959million (1+0)
= 8.68%−0

= 103.2 million