Currently, Forever Flowers Inc. has a capital structure consisting of 30% debt and 70% equity. Forever's debt currently has an 7% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium ( rMrRF ) is 5%. Using the CAPM, Forever estimates that its cost of equity is currently 13.5%. The company has a 40% tax rate. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. a. What is Forever's current WACC? Round your answer to two decimal places. b. What is the current beta on Forever's common stock? Round your answer to two decimal places. c. 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?) Round your answer to two decimal places. 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 bonds would rise to 10%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? Round your answer to two decimal places. e. What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places. f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? 34567891011121314%debtinoriginalcapitalstructure,wd%commonequityinoriginalcapitalstructYieldtomaturityondebt,rdRisk-freerate,rRFMarketriskpremium(rM-rRF)Costofcommonequity,r3Taxrate%debtinnewcapitalstructure,woNow%commonequityinnewcapitalstructureChangedyieldtomaturityondebt,roNew 15 Current WACC calculation: 16. WACC 18 Curront beta calculation: 192021Leveredbeta,biUnloveredbetacalculation:bu 22 23 22 Cost of equity calculation with changed capital structure: 25 Levered beta, bl 24 Cost of equity with new capital strucutre, fo hiow 28 WACC calculation with new capital structure: 29 WACC calcula 31 Recommendation on capital structure: Currently, Forever Flowers Inc. has a capital structure consisting of 30% debt and 70% equity. Forever's debt currently has an 7% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium ( rMrRF ) is 5%. Using the CAPM, Forever estimates that its cost of equity is currently 13.5%. The company has a 40% tax rate. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. a. What is Forever's current WACC? Round your answer to two decimal places. b. What is the current beta on Forever's common stock? Round your answer to two decimal places. c. 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?) Round your answer to two decimal places. 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 bonds would rise to 10%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? Round your answer to two decimal places. e. What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places. f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? 34567891011121314%debtinoriginalcapitalstructure,wd%commonequityinoriginalcapitalstructYieldtomaturityondebt,rdRisk-freerate,rRFMarketriskpremium(rM-rRF)Costofcommonequity,r3Taxrate%debtinnewcapitalstructure,woNow%commonequityinnewcapitalstructureChangedyieldtomaturityondebt,roNew 15 Current WACC calculation: 16. WACC 18 Curront beta calculation: 192021Leveredbeta,biUnloveredbetacalculation:bu 22 23 22 Cost of equity calculation with changed capital structure: 25 Levered beta, bl 24 Cost of equity with new capital strucutre, fo hiow 28 WACC calculation with new capital structure: 29 WACC calcula 31 Recommendation on capital structure
