(SOLVED) Recapitalization: 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.
Discipline: Finance
Type of Paper: QuestionAnswer
Academic Level: Undergrad. (yrs 12)
Paper Format: APA
Question
Recapitalization: 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 riskfree 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 11%. The company has a 40% tax rate. The data has been collected in the Microsoft Excel Online file below. Do not round intermediate calculations.

What is Forever's current WACC? Round your answer to two decimal places.
(fill in the blank) %

What is the current beta on Forever's common stock? Round your answer to two decimal places.
(fill in the blank)

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}?) Round your answer to two decimal places.
(fill in the blank)
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 9.5%. 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? Round your answer to two decimal places.
(fill in the blank) %

What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places.
(fill in the blank) %