Question

Q8

a) The common stock of Buildwell Conservation & Construction Inc. (BCCI) has a beta of 0.7. The Treasury bill rate is 4%, and the market risk premium is estimated at 8%. BCCI’s capital structure is 30% debt, paying an interest rate of 5%, and 70% equity. The company's debt is currently selling at par (100). Buildwell pays tax at 40%.

What is BCCI’s WACC? Express your answer as a percentage rounded to 2 decimal places.

b)

The firm you currently work for is looking to buy out a smaller firm and you have been given the task of estimating the value of the firm. The WACC of the target company is 9.50%. The company forecast free cash flow of €38 million for the next 3 years and forecast that their free cash flow will grow by 5% per year thereafter.

Using a discounted cashflow model, what is the value of the firm? Enter your answer in millions, rounded to the nearest million, eg. for 5 million enter 5.

Answer 1

a) WACC i.e weighted average cost of capital= For computing WACC we required return on equity.

Re= Rf+ (Rm-Rf)B

= 4%+(8)0.7= 9.6%

WACC of BCCI= Re*0.7+0.30(1-0.40)*kd

= 9.6*0.7+0.30(0.60)5= .6.72+0.9= 7.62%

b) Value of firm

WACC of target co.	9.50%
FCFF	38	$ million
Growth rate	5%
Value after 4 year	886.67
year	1	2	3	4
FCFF ( $ million)	38	38	38	886.67
discount factor	0.9132	0.8340	0.7617	0.6956
PV	35	32	29	617
Value of Firm	712	$ million