Currently, Bloom Flowers Inc. has a capital structure consisting of 20 percent debt and 80 percent equity. Blooms debt currently has an 8 percent yield to maturity. The risk-free rate (rRF) is 5 percent, and the market risk premium (r_M - r_RF) is 6 percent. Using the CAPM, Bloom estimates that its cost of equity is currently 12.5 percent. The company has a 40 percent tax rate.

a. What is Blooms current WACC?

b. What is the current beta on Blooms common stock?

c. What would Blooms beta be if the company had no debt in its capital structure? (That is, what is Blooms unlevered beta, b_U?) Blooms financial staff is considering changing its capital structure to 40 percent debt and 60 percent equity. If the company went ahead with the proposed change, the yield to maturity on the companys bonds would rise to 9.5 percent. The proposed change will have no effect on the companys tax rate.

d. What would be the companys new cost of equity if it adopted the proposed change in capital structure?

e. What would be the companys new WACC if it adopted the proposed change in capital structure?

f. Based on your answer to part e, would you advise Bloom to adopt the proposed change in capital structure? Explain.