Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN: 9781305635937
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 13, Problem 11P
RECAPITALIZATION 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 (rRF) is 6%, and the market risk premium (rM - rRF) is 7%. Using the
- a. What is Forever's current WACC?
- b. What is the current beta on Forever's common stock?
- 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?)
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?
- e. What would be the company's new WACC if it adopted the proposed change in capital structure?
- f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? Explain.
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RECAPITALIZATION Currently, Forever Flowers Inc. has a capital structure consisting of25% debt and 75% equity. Forever’s debt currently has a 7% yield to maturity. The risk-freerate rRF is 6%, and the market risk premium rM rRF is 7%. Using the CAPM, Foreverestimates that its cost of equity is currently 14.5%. The company has a 40% tax rate.a. What is Forever’s current WACC?b. What is the current beta on Forever’s common stock?c. What would Forever’s beta be if the company had no debt in its capital structure? (Thatis, what is Forever’s unlevered beta, bU?)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 thecompany’s bonds would rise to 10.5%. The proposed change will have no effect on thecompany’s tax rate.d. What would be the company’s new cost of equity if it adopted the proposed change incapital structure?e. What would be the company’s new WACC if it…
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Quantitative Problem: Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity. MME's debt currently has a 7% yield to maturity.
The risk-free rate (RF) is 5%, and the market risk premium (rĐĽ - ĐłRF) is 6%. Using the CAPM, MME estimates that its cost of equity is currently 11.6%. The company has a 40% tax rate.
a. What is MME's current WACC? Do not round intermediate calculations. Round your answer to two decimal places.
%
b. What is the current beta on MME's common stock? Do not round intermediate calculations. Round your answer to four decimal places.
c. What would MME's beta be if the company had no debt in its capital structure? (That is, what is MME's unlevered beta, bu?) Do not round intermediate calculations. Round your answer to four
decimal places.
MME's financial staff is considering changing its capital structure to 45% debt and 55% equity. If the company went ahead with the proposed change, the yield to maturity on the…
Chapter 13 Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Ch. 13 - Changes in sales cause changes in profits. Would...Ch. 13 - Would each of the following increase, decrease, or...Ch. 13 - Discuss the following statement: All else equal,...Ch. 13 - Prob. 4QCh. 13 - Which of the following would likely encourage a...Ch. 13 - Prob. 6QCh. 13 - Why is EBIT generally considered independent of...Ch. 13 - Is the debt level that maximizes a firm's expected...Ch. 13 - If a firm goes from zero debt to successively...Ch. 13 - Prob. 10Q
Ch. 13 - Prob. 11QCh. 13 - BREAK-EVEN ANALYSIS A company's fixed operating...Ch. 13 - OPTIMAL CAPITAL STRUCTURE Terrell Trucking Company...Ch. 13 - RISK ANALYSIS a. Given the following information,...Ch. 13 - Prob. 4PCh. 13 - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are...Ch. 13 - Prob. 6PCh. 13 - FINANCIAL LEVERAGE EFFECTS The Neal Company wants...Ch. 13 - HAMADA EQUATION Situational Software Co. (SSC) is...Ch. 13 - RECAPITALIZATION Tartan Industries currently has...Ch. 13 - BREAKEVEN AND OPERATING LEVERAGE a. Given the...Ch. 13 - RECAPITALIZATION Currently, Forever flowers Inc....Ch. 13 - BREAKEVEN AND LEVERAGE Wingler Communications...Ch. 13 - FINANCING ALTERNATIVES The Severn Company plans to...Ch. 13 - WACC AND OPTIMAL CAPITAL STRUCTURE Elliott...Ch. 13 - CAMPUS DELI INC. OPTIMAL CAPITAL STRUCTURE Assume...Ch. 13 - To get an overall picture of each company's...Ch. 13 - Repeat this procedure for the other three...
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