Question
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
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 5%, and the market risk premium (rM - rRF) is 8%. Using the CAPM, Forever estimates that its cost of equity is currently 12.5%. The company has a 25% tax rate.
- What is Forever's current WACC? Round your answer to two decimal places. %
- What is the current beta on Forever's common stock? Round your answer to two decimal 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, bU?) Do not round intermediate calculations. Round your answer to two decimal places.
- What would be the company's new cost of equity if it adopted the proposed change in capital structure? Do not round intermediate calculations. Round your answer to two decimal places. %
- What would be the company's new WACC if it adopted the proposed change in capital structure? Do not round intermediate calculations. Round your answer to two decimal places. %
- Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? -Select-YesNo
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Succeeding in Business with Microsoft Excel 2013 A Problem Solving Approach
Authors: Debra Gross, Frank Akaiwa, Karleen Nordquist
1st edition
978-1285099149, 9781285963969, 1285099141, 1285963962, 978-1285715346
