Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's debt currently has an 7% yield to maturity. The risk-free rate (TRF) is 4%, and the market risk premium (rM - TRF) is 4%. Using the CAPM, Forever estimates that its cost of equity is currently 12%. The company has a 40% tax rate. a. What is Forever's current WACC? Round your answer to two decimal places. 10.44 b. What is the current beta on Forever's common stock? Round your answer to two decimal places. 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?) Do not round intermediate calculations. Round your answer to two decimal places. 1.74 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 10.5%. 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? Do not round intermediate calculations. Round your answer to two decimal places. 2.44 % e. 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. % Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's debt currently has an 7% yield to maturity. The risk-free rate (TRF) is 4%, and the market risk premium (rM - TRF) is 4%. Using the CAPM, Forever estimates that its cost of equity is currently 12%. The company has a 40% tax rate. a. What is Forever's current WACC? Round your answer to two decimal places. 10.44 b. What is the current beta on Forever's common stock? Round your answer to two decimal places. 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?) Do not round intermediate calculations. Round your answer to two decimal places. 1.74 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 10.5%. 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? Do not round intermediate calculations. Round your answer to two decimal places. 2.44 % e. 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. %
Expert Answer:
Answer rating: 100% (QA)
a What is Forevers current WACC Round your answer to two decimal places Forevers current WACC is 1044 This can be calculated by multiplying the cost o... View the full answer
Related Book For
Fundamentals Of Financial Management
ISBN: 9781337902571
Concise 10th Edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
Students also viewed these accounting questions
-
A company wishes to maintain a capital structure consisting of 20% debt, 40% Preferred Stock, and 40% Common Stock. The before tax cost of the debt is 6%, the cost of the Preferred Stock is 9% and...
-
Currently, Forever Flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forevers debt currently has a 7% yield to maturity. The risk-free rate (r RF ) is 6%, and the market...
-
Superior Clamps, Inc., has a capital structure consisting of 7 million shares of common stock and 900,000 warrants. Each warrant gives its owner the right to purchase one share of newly issued common...
-
In Problems, assume that the populations are normally distributed and that independent sampling occurred. (a) Test the hypothesis that 1 2 at the a = 0.1 level of significance for the given sample...
-
Dragonfly Limited (Dragonfly), a diversified electronics firm headquartered in Singapore, reported the following income statement information for its year ended December 31, Year 7. Dragonfly applies...
-
Does Allen have a responsibility to do what the president is asking him to do? Using rule, virtue, rights, and justice theories, evaluate Allens decision.
-
You want to determine the mean height of all basketball players on the LA Lakers team. Determine whether a census is practical in the situations described. Explain your reasoning.
-
Better Corp. (BC) began operations on January 1, Year 1. During Year 1, BC experienced the following accounting events: 1. Acquired $7,000 cash from the issue of common stock. 2. Borrowed $12,000...
-
5. Two events occur at positions on the x-axis separated by a distance of Ax and by a time interval of At, according to one observer (Ann). Ann notes that when the first event occurs (a flash of...
-
Coffee Blending and Sales Hill-O-Beans Coffee Company blends four component beans into three final blends of coffee: one is sold to luxury hotels, another to restaurants, and the third to...
-
Assume (1) estimated fixed manufacturing overhead for the coming period of $233,000, (2) estimated variable manufacturing overhead of $2.00 per direct labor hour, (3) actual manufacturing overhead...
-
Calculate the proposed consolidation loan ( including car loan and all credit cards ) using a rate of 1 0 % , calculate the payment for a 2 4 - month term, a 3 6 - month term and a 4 8 - month term....
-
Apply Molecular Orbital theory to XeF2 molecule (linear shape, Dah point group). Identify and draw atomic orbitals (AOS) and ligand group orbitals (LGOs) for the central atom and the ligand group...
-
Establish why updating the existing risk control was needed for the identified risk?
-
Think of a particular segment of the mass audience that could be served by a magazine but doesn't seem to be, and write the cover magazine for that audience. In a short paragraph, describe the...
-
1. What is NOT a constraint of embedded systems? A. have limited signal range B. difficult or impossible to patch C. usually no MFA D. most users know about their vulnerabilities 2....
-
All bonds are semiannual with a face value of $1,000 You need to adjust the RATES and NPER for all bonds since they are semiannual 1. A bond has a coupon rate of 4% and makes semiannual payments. The...
-
Find a polar equation for the curve represented by the given Cartesian equation. 4y 2 = x
-
The real risk-free rate is 2.05%. Inflation is expected to be 3.05% this year, 4.75% next year, and 2.3% thereafter. The maturity risk premium is estimated to be 0.05 X (t 1)%, where t = number of...
-
How long will it take $300 to double if it earns the following rates? Compounding occurs once a year. a. 6% b. 13% c. 21% d. 100%
-
Currently, Forever Flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has a 7% yield to maturity. The risk-free rate (r n ) is 6%, and the market...
-
Suppose a job enrichment effort in one plant of a manufacturing firm is judged to be very successful. You are the corporate change agent responsible for the project, and you wish to diffuse it to...
-
Discuss: The best organizational structure to generate innovative ideas might not be the best structure to implement those ideas.
-
What qualities would the ideal gatekeeper possess to facilitate the communication of technical information in the firm?
Study smarter with the SolutionInn App