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?

Deflections, LLC, currently net leases its headquarters office building for $70,000 per month, and this lease has two years left to run. (Under a commercial fully net lease, the tenant pays for all maintenance, repairs, insurance and property taxes.) Deflections considers the rent to be less than the current market rate, but expected growth in its headquarters staff will require it to spend $1 million in repartitioning, wiring and lighting this office space. As an alternative, it is considering building its own HQ building and financing it with a down payment of $1 million and the remainder with a mortgage loan. Develop the following four alternatives for financing the project:

a. If this mortgage loan would be at 7.79% annual interest, amortized in equal monthly P&I payments over 30 years, and the company limits these payments to $55,000 per month, how much can it finance with this loan?

b. If this mortgage loan would be at 5.75% annual interest, amortized in equal monthly P&I payments over 25 years, and the company limits these payments to $62,000 per month, how much can it finance with this loan?