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In: Finance
36. Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity....
36. Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Bloom’s debt currently has an 8.5% yield to maturity. The risk-free rate (rRF) is 4.3%, and the market risk premium (rM – rRF) is 7%. Using the CAPM, Bloom estimates that its cost of equity is currently 16%. The company has a 33% tax rate. Bloom’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 9.1%. 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? Carry out calculations with complete accuracy and report answers to four decimal places.
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's...
Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's debt currently has an 9% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 8%. Using the CAPM, Forever estimates that its cost of equity is currently 12%. 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...
Currently, Forever Flowers Inc. has a capital structure consisting of 30% debt and 70% equity. Forever's...
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 risk-free rate (rRF) is 4%,
and the market risk premium (rM- rRF) is 8%.
Using the CAPM, Forever estimates that its cost of equity is
currently 12%. 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...
Currently, Forever Flowers Inc. has a capital structure consisting of 30% debt and 70% equity. Forever's...
Currently, Forever Flowers Inc. has a capital structure
consisting of 30% debt and 70% equity. Forever's debt currently has
an 8% yield to maturity. The risk-free rate (rRF) is 3%,
and the market risk premium (rM - rRF) is 4%.
Using the CAPM, Forever estimates that its cost of equity is
currently 14.5%. 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...
Excel Online Structured Activity: Recapitalization Currently, Forever Flowers Inc. has a capital structure consisting of 20%...
Excel Online Structured Activity: Recapitalization
Currently, Forever Flowers Inc. has a capital structure
consisting of 20% debt and 80% equity. Forever's debt currently has
an 9% yield to maturity. The risk-free rate (rRF) is 6%,
and the market risk premium (rM - rRF) is 8%.
Using the CAPM, Forever estimates that its cost of equity is
currently 12%. The company has a 40% tax rate. The data has been
collected in the Microsoft Excel Online file below. Open the
spreadsheet...
Assume that with a capital structure of 20% debt and 80% equity the cost of debt...
Assume that with a capital structure of 20% debt and 80% equity
the cost of debt is 10% and cost of equity is 14%. The tax rate is
40%. The current value of the business is $ 500,000. The finance
manager of the company is recommending a change of capital
structure to 80% debt and 20% equity. He states that at effective
cost of debt of 10% the increase of debt in capital structure would
always increase the value of...
Excel Online Structured Activity: Recapitalization Currently, Forever Flowers Inc. has a capital structure consisting of 25%...
Excel Online Structured Activity: Recapitalization
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 (rRF) is 4%,
and the market risk premium (rM - rRF) is 5%.
Using the CAPM, Forever estimates that its cost of equity is
currently 12%. The company has a 40% tax rate. The data has been
collected in the Microsoft Excel Online file below. Open the
spreadsheet...
Globex Corp. currently has a capital structure consisting of 30% debt and 70% equity. However, Globex...
Globex Corp. currently has a capital structure consisting of 30%
debt and 70% equity. However, Globex Corp.’s CFO has suggested that
the firm increase its debt ratio to 50%. The current risk-free rate
is 3.5%, the market risk premium is 7%, and Globex Corp.’s beta is
1.25.
If the firm’s tax rate is 45%, what will be the beta of an
all-equity firm if its operations were exactly the same?
(.96,1.11,.86,1.01)
Now consider the case of another company:
U.S....
Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity....
Currently, Meyers Manufacturing Enterprises (MME) has a capital
structure consisting of 35% debt and 65% equity. MME's debt
currently has a 7.5% yield to maturity. The risk-free rate
(rRF) is 5.5%, and the market risk premium
(rM – rRF) is 6.5%. Using the CAPM, MME
estimates that its cost of equity is currently 10.3%. The company
has a 40% tax rate.
What is MME's current WACC? Round your answer to 2 decimal
places. Do not round intermediate calculations.
%
What...
Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity....
Currently, Meyers Manufacturing Enterprises (MME) has a capital
structure consisting of 35% debt and 65% equity. MME's debt
currently has a 7.1% yield to maturity. The risk-free rate
(rRF) is 5.1%, and the market risk premium
(rM – rRF) is 6.1%. Using the CAPM, MME
estimates that its cost of equity is currently 10.3%. The company
has a 40% tax rate.
a. What is MME's current WACC? Round your answer to 2 decimal
places. Do not round intermediate calculations.
%...
Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity....
Currently, Meyers Manufacturing Enterprises (MME) has a capital
structure consisting of 35% debt and 65% equity. MME's debt
currently has a 7.1% yield to maturity. The risk-free rate
(rRF) is 5.1%, and the market risk premium
(rM – rRF) is 6.1%. Using the CAPM, MME
estimates that its cost of equity is currently 12.4%. The company
has a 40% tax rate.
a. What is MME's current WACC? Round your answer to 2 decimal
places. Do not round intermediate calculations.
%...
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