Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 14, 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, buy?
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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Currently Forever Flowers Inc, has a capital structure.
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Da) What is Forever's current WACC? Round to two decimal places
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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…
Please show all work on excel
Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Cartwright has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/E ratio is 0.25.) The risk-free rate is 6% and the market risk premium, rM – rRF, is 5%. Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%.
A. What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
Chapter 14 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 14 - Changes in sales cause changes in profits. Would...Ch. 14 - Would each of the following increase, decrease, or...Ch. 14 - Discuss the following statement: All else equal,...Ch. 14 - Prob. 4QCh. 14 - Prob. 5QCh. 14 - Why do public utilities generally use different...Ch. 14 - Why is EBIT generally considered independent of...Ch. 14 - Is the dept level that maximizes a firms expected...Ch. 14 - If a firm goes from zero dept to successively...Ch. 14 - Prob. 10Q
Ch. 14 - A firm is about to double its assets to serve its...Ch. 14 - BREAK-EVEN ANALYSIS A company's fixed operating...Ch. 14 - OPTIMAL CAPITAL STRUCTURE Terrell Trucking Company...Ch. 14 - Prob. 3PCh. 14 - UNLEVERED BETA Hartman Motor has. 18 million in...Ch. 14 - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are...Ch. 14 - Prob. 6PCh. 14 - Prob. 7PCh. 14 - HAMADA EQUATION Situational Software Co. (SSC) is...Ch. 14 - RECAPITALIZATION Tartan industries currently has...Ch. 14 - BREAKEVEN AND OPERATING LEVERAGE a. Given the...Ch. 14 - RECAPITALIZATION Currently, Forever Flowers Inc....Ch. 14 - BREAKEVEN AND LEVERAGE Wingler Communications...Ch. 14 - FINANCING ALTERNATIVES The Severn Company plans to...Ch. 14 - WACC AND OPTIMAL CAPITAL STRUCTURE Elliott...Ch. 14 - Prob. 1TCLCh. 14 - Exploring the Capital Structures for Four...
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