Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
8th Edition
ISBN: 9781285065137
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 13, Problem 11P
RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Bloom’s debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM – rRF) is 6%. Using the
- a. What is Bloom’s current WACC?
- b. What is the current beta on Bloom’s common stock?
- c. What would Bloom’s beta be if the company had no debt in its capital structure? (That is, what is Bloom’s unlevered beta, bU?)
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 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 Bloom to adopt the proposed change in capital structure? Explain.
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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?
A company is estimating its optimal capital structure. Now the company has a capital structure that consists of 20% debt and 80% equity, based on market values (debt to equity D/S ratio is 0.25). The risk-free rate (rRF) is 5% and the market risk premium (rM – rRF) is 6%. Currently the company’s cost of equity, which is based on the CAPM, is 14% and its tax rate is 20%. Find the firm’s current leveraged beta using the CAPM
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Chapter 13 Solutions
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (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 - Prob. 1PCh. 13 - OPTIMAL CAPITAL STRUCTURE Jackson. Trucking...Ch. 13 - RISK ANALYSIS a. Given the following information,...Ch. 13 - UNLEVERED BETA Harley Motors has 10 million in...Ch. 13 - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are...Ch. 13 - BREAK-EVEN ANALYSIS The Weaver Watch Company sells...Ch. 13 - FINANCIAL LEVERAGE EFFECTS The Neal Company wants...Ch. 13 - HAMADA EQUATION Cyclone Software Co. is trying to...Ch. 13 - RECAPITALIZATION Tapley Inc. currently has total...Ch. 13 - BREAKEVEN AND OPERATING LEVERAGE a. Given the...Ch. 13 - RECAPITALIZATION Currently, Bloom Flowers Inc. has...Ch. 13 - BREAKEVEN AND LEVERAGE Wingler Communications...Ch. 13 - Prob. 13PCh. 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 companys capital...
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