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

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 bond would rise to 10.5%. The proposed change will have no effect on the company's tax rate.

A. What would be the company's new cost of equity if it adopted the proposed change in capital structure ?

B. What would be the company's new WACC if it adopted the proposed change in capital structure?

C. Based on your answer to part B, would you advised Forever to adopt the proposed change in capital structure? Explain