Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN: 9781337902571
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 13, Problem 11P

RECAPITALIZATION Currently, Forever flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 7%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate.

  1. a. What is Forever's current WACC?
  2. b. What is the current beta on Forever's common stock?
  3. c. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bU?)

Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 10.5%. The proposed change will have no effect on the company's tax rate.

  1. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure?
  2. e. What would be the company's new WACC if it adopted the proposed change in capital structure?
  3. f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? Explain.
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RECAPITALIZATION Currently, Forever Flowers Inc. has a capital structure consisting of25% debt and 75% equity. Forever’s debt currently has a 7% yield to maturity. The risk-freerate rRF is 6%, and the market risk premium rM rRF is 7%. Using the CAPM, Foreverestimates that its cost of equity is currently 14.5%. The company has a 40% tax rate.a. What is Forever’s current WACC?b. What is the current beta on Forever’s common stock?c. What would Forever’s beta be if the company had no debt in its capital structure? (Thatis, what is Forever’s unlevered beta, bU?)Forever’s financial staff is considering changing its capital structure to 40% debt and 60%equity. If the company went ahead with the proposed change, the yield to maturity on thecompany’s bonds would rise to 10.5%. The proposed change will have no effect on thecompany’s tax rate.d. What would be the company’s new cost of equity if it adopted the proposed change incapital structure?e. What would be the company’s new WACC if it…
Currently Forever Flowers Inc, has a capital structure. consisting of 25% debt and 75% equity Forever's D debt currently has 9% yield to maturity. The risk free rate is 3% and the market risk premium is 6%. D Using the CAPM, Forever estimates that its cost of Dequity is currently 11.5% The company has. a 25% tax rate. PL AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA Da) What is Forever's current WACC? Round to two decimal places %% Db). What is the current beta on Forever's common stock? Round to two clecional places () What would Forever's beta be if the company had no debt, in its capital structure? (That is, what is Forever's unlevered beta) your answer to two decimal places. Round ▷ Forever's financial staff is considering changing it capital I went ahead with the proposed change, the yield to maturity Dstmeture to 40% debt and 60% equity. If the comparaturity on the company's bonds would rise to 10%. The proposed change will have no effect on the tax rate company's Ad) What would be the…
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