Final answer:
To calculate Forever Flowers Inc.'s current WACC, we consider the proportions of debt and equity in their capital structure as well as the costs of each component. The WACC is approximately 11.19%.
Step-by-step explanation:
To calculate the Weighted Average Cost of Capital (WACC) for Forever Flowers Inc., we need to consider the proportions of debt and equity in their capital structure as well as the costs of each component. The formula for WACC is:
WACC = (% Debt * Cost of Debt) + (% Equity * Cost of Equity)
Given that Forever Flowers Inc. has a capital structure consisting of 35% debt and 65% equity, a 9% yield to maturity for debt, a 12.5% cost of equity, and a 40% tax rate, we can calculate the WACC:
WACC = (0.35 * 0.09 * (1 - 0.4)) + (0.65 * 0.125) = 0.0306 + 0.08125 = 0.11185
Therefore, Forever Flowers Inc.'s current WACC is approximately 11.19%.
Forever Flowers Inc.'s current weighted average cost of capital (WACC) is 10.05%, which is calculated by combining the costs of equity and debt, adjusted for the company's tax rate and capital structure.
To calculate Forever Flowers Inc.'s current weighted average cost of capital (WACC), we need to take into account the cost of debt, the cost of equity, the proportions of debt and equity in the capital structure, and the tax rate. The formula to calculate WACC is:
WACC = (E / V) * Re + (D / V) * Rd * (1 - Tc)
Where:
E = market value of the equity
D = market value of the debt
V = D + E = total market value of the company's financing (equity and debt)
Re = cost of equity
Rd = cost of debt
Tc = corporate tax rate
Given:
Debt to Equity ratio = 35/65
Cost of Debt (Rd) = 9%
Cost of Equity (Re) = 12.5%
Tax Rate (Tc) = 40%
Using the given information, we calculate WACC as follows:
WACC = (0.65 * 12.5%) + (0.35 * 9% * (1 - 0.40)) = 8.1625% + 1.89% = 10.05%
Therefore, Forever Flowers Inc.'s current WACC is 10.05%, rounded to two decimals.