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

a. What is Forevers current WACC?

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

c. What would Forevers beta be if the company had no debt in its capital structure? (That is, what is Forevers unlevered beta, b_U ?)

Forevers 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 companys bonds would rise to 10.5%. 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 Forever to adopt the proposed change in capital structure? Explain.