RECAPITALIZATION Currently, Forever Flowers Inc. has a capital structure consist

Question

RECAPITALIZATION Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's debt currently has an 9% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 8%. Using the CAPM, Forever estimates that its cost of equity is currently 13.5%. The company has a 40% tax rate. What is Forever's current WACC? Round your answer to two decimal places. % What is the current beta on Forever's common stock? Round your answer to two decimal places. 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?) Do not round intermediate calculations. 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. 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. % What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places. %

Explanation / Answer

Capital Structure = Equity is 80%, Debt is 20% Debt yield = 9% Tax rate = 40% After tax cvost debt = 9 (1-0.40) = 5.4% Risk free return (Rf) = 6% Risk premium (Rm-Rf)= 8% Cost of equity = 13.5% Current WACC = 0.80(13.5)+0.20(5.4) = 11.88% Current Beta : CAPM return = Rf + Beta (Rm-Rf) 11.88 = 6+ beta (8) Beta = 0.735 Future Beta with 100 % equity capital structure : CAPM return = Rf + Beta (Rm-Rf) 13.5 = 6+ Beta(8) Beta = 0.9375 New capital Structure = 40% debt and 60% equity Tax rate = 40% Debt rate = 10% After tax cost of debt = 10 (1-0.40) = 6%

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.