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 (rar) is 5%, and the market risk premium (rm- Tar) is 8%. Using the CAPM, Forever estimates that its cost of equity is currently 12.5%. 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 to answer the questions below. Do not round intermediate calculations. X Open spreadsheet a. What is Forever's current WACC? Round your answer to two decimal places. 11.925% b. What is the current beta on Forever's common stock? Round your answer to two decimal places. 1.21 c. 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?) Round your answer to two decimal places. 1.00 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. d. 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. 15.4% e. What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places. 12.08% f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? No ✔✔
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 (rar) is 5%, and the market risk premium (rm- Tar) is 8%. Using the CAPM, Forever estimates that its cost of equity is currently 12.5%. 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 to answer the questions below. Do not round intermediate calculations. X Open spreadsheet a. What is Forever's current WACC? Round your answer to two decimal places. 11.925% b. What is the current beta on Forever's common stock? Round your answer to two decimal places. 1.21 c. 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?) Round your answer to two decimal places. 1.00 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. d. 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. 15.4% e. What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places. 12.08% f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? No ✔✔
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
Transcribed Image Text: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 (rr) is 5%, and the market risk premium (rm-
TRF) is 8%. Using the CAPM, Forever estimates that its cost of equity is currently 12.5%. 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 to answer the questions below. Do not round intermediate calculations.
Open spreadsheet
a. What is Forever's current WACC? Round your answer to two decimal places.
11.925 %
b. What is the current beta on Forever's common stock? Round your answer to two decimal places.
1.21
c. 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?) Round your answer to two decimal places.
1.00 X
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.
d. 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.
15.4%
e. What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places.
12.08%
f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure?
No ✔✔
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