Currently, Meyers Manufacturing Enterprises (MME) has a capitalstructure consisting of 35% debt and 65% equity. MME's debtcurrently has a 7.1% yield to maturity. The risk-free rate(rRF) is 5.1%, and the market risk premium(rM – rRF) is 6.1%. Using the CAPM, MMEestimates that its cost of equity is currently 12.4%. The companyhas a 40% tax rate.
a. What is MME's current WACC? Round your answer to 2 decimalplaces. Do not round intermediate calculations.
%
b. What is the current beta on MME's common stock? Round youranswer to 4 decimal places. Do not round intermediatecalculations.
c. What would MME's beta be if the company had no debt in itscapital structure? (That is, what is MME's unlevered beta,bU?) Round your answer to 4 decimal places. Do not roundintermediate calculations.
MME's financial staff is considering changing its capitalstructure to 45% debt and 55% equity. If the company went aheadwith the proposed change, the yield to maturity on the company'sbonds would rise to 7.6%. The proposed change will have no effecton the company's tax rate.
d. What would be the company's new cost of equity if it adoptedthe proposed change in capital structure? Round your answer to 2decimal places. Do not round intermediate calculations.
%
e. What would be the company's new WACC if it adopted theproposed change in capital structure? Round your answer to 2decimal places. Do not round intermediate calculations.
%
f. Based on your answer to Part e, would you advise MME to adoptthe proposed change in capital structure?
The firm should proceed with the recapitalization. OR The firmshould not proceed with the recapitalization. ?
