Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity. MME's debt currently has a 6.5% yield to maturity. The risk-free rate (rRF) is 4.5%, and the market risk premium (rM rRF) is 5.5%. Using the CAPM, MME estimates that its cost of equity is currently 11.8%. The company has a 40% tax rate.

a. What is MME's current WACC? Do not round intermediate calculations. Round your answer to two decimal places. %

b. What is the current beta on MME's common stock? Do not round intermediate calculations. Round your answer to four decimal places.

c. What would MME's beta be if the company had no debt in its capital structure? (That is, what is MME's unlevered beta, bU?) Do not round intermediate calculations. Round your answer to four decimal places. MME's financial staff is considering changing its capital structure to 45% debt and 55% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 7%. 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? Do not round intermediate calculations. 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? Do not round intermediate calculations. Round your answer to two decimal places.

%

Currently, Forever Flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has an 9% yield to maturity. The risk-free rate (r_RF) is 4%, and the market risk premium (r_M - r_RF) is 7%. Using the CAPM, Forever estimates that its cost of equity is currently 12.5%. The company has a 25% 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 bonds would rise to 10.5%. The proposed change will have no effect on the company's tax rate.

1. hat is Forever's current WACC? Round your answer to two decimal places. %
3. What is the current beta on Forever's common stock? Round your answer to two decimal places.
5. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, b_U?) Do not round intermediate calculations. Round your answer to two decimal places.
6. 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. %
8. 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. %

Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $26 million in invested capital, has $3.9 million of EBIT, and is in the 25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 55% and pays 11% interest on its debt, whereas LL has a 20% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure.

1. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places. ROIC for firm LL: % ROIC for firm HL: %
3. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places. ROE for firm LL: % ROE for firm HL: %
5. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 20% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal placE

%