Proposed change will have no effect on the company tax rate

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Reference no: EM132039858

Quantitative Problem: Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity. MME's debt currently has a 6.9% yield to maturity. The risk-free rate (rRF) is 4.9%, and the market risk premium (rM – rRF) is 5.9%. 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.

______%

b. What is the current beta on MME's common stock? Round your answer to 4 decimal places. Do not round intermediate calculations. _______

c. What would MME's beta be if the company had no debt in its capital structure? (That is, what is MME's unlevered beta, bU?) Round your answer to 4 decimal places. Do not round intermediate calculations. _______

MME's financial staff is considering changing its capital structure to 45% debt and 55% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 7.4%. 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? Round your answer to 2 decimal places. Do not round intermediate calculations.

______%

e. What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to 2 decimal places. Do not round intermediate calculations.

______%

Reference no: EM132039858

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