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    15-11 Recapitalization: RF M RF

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    Bagus Septiawan
    The document discusses Bloom Flowers' current capital structure, weighted average cost of capital (WACC), and beta. It then considers a proposed change to the capital structure, recalculating the new WACC and cost of equity. The current WACC is 10.96% and would decrease to 10.7% under the proposed capital structure. Therefore, the summary recommends Bloom adopt the proposed change.

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    15-11 Recapitalization: RF M RF

    Uploaded by

    Bagus Septiawan
    75 views2 pages
    The document discusses Bloom Flowers' current capital structure, weighted average cost of capital (WACC), and beta. It then considers a proposed change to the capital structure, recalculating the new WACC and cost of equity. The current WACC is 10.96% and would decrease to 10.7% under the proposed capital structure. Therefore, the summary recommends Bloom adopt the proposed change.

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    15-11

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    The document discusses Bloom Flowers' current capital structure, weighted average cost of capital (WACC), and beta. It then considers a proposed change to the capital structure, recalculating the new WACC and cost of equity. The current WACC is 10.96% and would decrease to 10.7% under the proposed capital structure. Therefore, the summary recommends Bloom adopt the proposed change.

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    © All Rights Reserved
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    75 views2 pages

    15-11 Recapitalization: RF M RF

    Uploaded by

    Bagus Septiawan
    The document discusses Bloom Flowers' current capital structure, weighted average cost of capital (WACC), and beta. It then considers a proposed change to the capital structure, recalculating the new WACC and cost of equity. The current WACC is 10.96% and would decrease to 10.7% under the proposed capital structure. Therefore, the summary recommends Bloom adopt the proposed change.

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    15-11 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 (r RF) is 5%, and the
    market risk premium (rM - rRF) is 6%. Using the CAPM, Bloom estimates that its cost of
    equity is currently 12.5%. The company has a 40% tax rate.
    a. What is Bloom's current WACC?
    WACC = wdrd(1 – T) + wcrs
    = (20%)(8%)(1 – 40%) + (80%)(12.5%)
    = (0.2)(0.08)(0.6) + (0.8)(0.125)
    = 0.0096 + 0.1
    = 0.1096
    = 10.96%
    b. What is the current beta on Bloom's common stock?
    The CAPM equation
    rs = rRF + (RPM)bi
    rs = rRF + (rM - rRF)bi
     12.5% = 5% + (6%)bi
    0.125 = 0.05 + 0.06bi
    0.125 – 0.05 = 0.06bi
    0.075 = 0.06bi
    bi = 0.075 / 0.06
    bi = 1.25
    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?)
    bU = bL / [1 + (1 – T) (D/E)]
    = 1.25 / [1 + (1 – 0.4) (0.2/0.8)]
    = 1.25 / [1 + (0.6) (0.25)]
    = 1.25 / [1 + 0.15]
    = 1.25 / 1.15
    = 1.087
    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?
     bU = bL / [1 + (1 – T) (D/E)]
    bL = bU x [1 + (1 – T) (D/E)]
    = 1.087 x [1 + (1 – 0.4) (0.4/0.6)]
    = 1.087 x [1 + (0.6) (0.67)]
    = 1.087 x [1 + 0.402]
    = 1.087 x 1.402
    = 1.524
     rs = rRF + (rM - rRF)bi
    = 0.05 + (0.06) (1.524)
    = 0.05 + 0.091
    = 0.141
    = 14.1%
    e. What would be the company's new WACC if it adopted the proposed change in capital
    structure?
    WACC = wdrd(1 – T) + wcrs
    = (40%)(9.5%)(1 – 40%) + (60%)(14.1%)
    = (0.4)(0.095)(1-0.4) + (0.6)(0.141)
    = (0.4)(0.095)(0.6) + (0.6)(0.141)
    = 0.0228 + 0.0846
    = 0.107
    = 10.7%
    f. Based on your answer to part e, would you advise Bloom to adopt the proposed change in
    capital structure? Explain.
    Dengan mempertimbangkan WACCnya, sebaiknya perusahaan melakukan perubahan
    sutruktur modal atau rekapitalisasi. Dengan dilakukannya rekapitalisasi, WACC akan turun
    dari 10,96% menjadi 10,7%.

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