Question

The common stock of Buildwell Conservation & Construction Inc. (BCCI) has a beta of 0.9. The...

The common stock of Buildwell Conservation & Construction Inc. (BCCI) has a beta of 0.9. The Treasury bill rate is 4%, and the market risk premium is estimated at 8%. BCCI’s capital structure is 38% debt, paying an interest rate of 7%, and 62% 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.

b. What is its WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Homework Answers

Answer #1

a

Cost of equity
As per CAPM
Cost of equity = risk-free rate + beta * (Market risk premium)
Cost of equity% = 4 + 0.9 * (8)
Cost of equity% = 11.2

b

Weight of equity = 1-D/A
Weight of equity = 1-0.38
W(E)=0.62
Weight of debt = D/A
Weight of debt = 0.38
W(D)=0.38
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 7*(1-0.4)
= 4.2
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=4.2*0.38+11.2*0.62
WACC =8.54%
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