What is Forever's current WACC? Round your answer to two decimal
places.
=proportion of debt*yield to maturity*(1-tax rate)+proportion of
equity*cost of equity
=25%*9%*(1-40%)+75%*15%
=12.600%
What is the current beta on Forever's common stock? Round your
answer to two decimal places.
=(cost of equity-risk free rate)/market risk premium
=(15%-4%)/4%
=2.75
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.
=Current beta/(1+(1-tax rate)*Debt/Equity)
=2.75/(1+(1-40%)*25%/75%)
=2.291666667
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.
=risk free rate+New beta*market risk premium
=4%+2.291666667*(1+(1-40%)*40%/60%)*4%
=16.833333%
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.
=proportion of debt*yield to maturity*(1-tax rate)+proportion of
equity*cost of equity
=40%*10%*(1-40%)+60%*16.833333%
=12.500000%
Based on your answer to part e, would you advise Forever to
adopt the proposed change in capital structure?
YES
Currently, Forever Flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's...
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Currently, Forever Flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has an 7% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM - rRF) is 4%. Using the CAPM, Forever estimates that its cost of equity is currently 12.5%. 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...
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Currently, Forever Flowers Inc. has a capital structure consisting of 35% debt and 65% equity. Forever's debt currently has an 7% 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 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...
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