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What is WACC, current beta, Unlevered beta?

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Currently, Bloom Flowers Inc. has a capital structure consisting of 20 percent debt and 80 percent equity. Bloom's debt currently has 8 percent yield to maturity. The risk free rate is 5 percent and the market risk premium is 6 percent. Using CAPM, Bloom estimates that its cost of equity is currently 12.5 percent. The company has a 49 percent tax rate.

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

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Solution Summary

The solution computes WACC, current beta and Unlevered beta for Bloom Flowers Inc.

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Using CAPM, Cost of Equity = Risk Free rate + Beta * Market Risk Premium

WACC = Weightage of Equity * Cost of Equity + Weightage of Debt*Cost of Debt*(1- tax rate)

Now,

WACC = ...

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