Question

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25 The common stock of Buildwell Conservation & Construction Inc. (BCCI) has a beta of.9. The Treasury bill rate is 4%, and the market risk premium is estimated at 8%. BCCI's capital structure is 27% debt, paying an interest rate of 6%, and 73% equity. The debt sells at par. Buildwell pays tax at 40%. a. What is BCCI's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) 00:40:28 Cost of equity capital 11.2 % b. What is its WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) WACC % c. If BCCI is presented with a project with an internal rate of return of 10%, should it accept the project if it has the same level of risk as the current firm? O Yes O No

Answer 1

a)

As per CAPM cost of equity = risk free rate + beta*market risk premium

= 4% + 0.9*8%

= 11.20%

b)

WACC = (We*Ke) + (Wd*Kd*(1-tax))

where, We and Wd = weights of equity and debt

Ke and Kd = cost of equity and debt

WACC = (0.73*11.20 + 0.27*6*(1-0.4))

= 9.15%

c)

Answer is Yes. because Project IRR is greater than WACC

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