Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Currently, Forever Flowers Inc. has a capital structure consisting of 35% debt and 65% equity. Forevers's debt currently has am 9% yield to maturity. The

Currently, Forever Flowers Inc. has a capital structure consisting of 35% debt and 65% equity. Forevers's debt currently has am 9% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM-rRF) is 5%. Using the CAPM, Forever estimates that its cost of equity is currently 12.5%. The ocmpany has a 40% tax rate.

a. What is foreveres current WACC? Round to two decimals?

_______%?

b. What is the curretn beta on forevers common stock? Round to two decimals?

______%?

c. what would forevers beta be if the ocmany had no debt in its capital structure? (That is, what is Forevers unlevered beta, bu?) Do not round intermediate calculations. Round your answer to two decimal places?

Froevers financial staff is considering changing its captial structure to 40% debt and 60% equity. IF the company went ahead with the proposd 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 comapnys new cost of equity if it adopted the proposed change in capital structure?

_______%?

e. What would the comapnys new WACC if ti adopted the proposed change in capital structure?

_________%?

f. Based on your answer to part e, wuld you advise forever to adopt change in captial structure?

Yes or No?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Financial Modelling Model Design And Best Practices Using Excel And VBA

Authors: Michael Rees

1st Edition

111890401X, 978-1118904015

More Books

Students also viewed these Finance questions

Question

Which cost management approach will you take?

Answered: 1 week ago

Question

What is the message repetition?

Answered: 1 week ago

Question

What is the budget for this project?

Answered: 1 week ago