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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.

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jeff jeffy answered 1 year ago
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