Question
Recapitalization Currently, Bloom Flowers Inc. has a capital structure consisting of 30% debt and 70% equity. Bloom's debt currently has an 8% yield to maturity.
Recapitalization
Currently, Bloom Flowers Inc. has a capital structure consisting of 30% debt and 70% equity. Bloom's debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 4%. Using the CAPM, Bloom estimates that its cost of equity is currently 15%. The company has a 40% tax rate.
Bloom'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.
- What is Bloom's current WACC? Round your answer to two decimal places. %
- What is the current beta on Bloom's common stock? Round your answer to two decimal places.
- What would Bloom's beta be if the company had no debt in its capital structure? (That is, what is Bloom's unlevered beta, bU?) 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? Round your answer to two decimal places. %
- What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places.
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