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 30% debt, paying a 5% interest rate, and 70% equity. Buildwell pays tax at 40%. (LO13-1) a. What is BCCI's cost of equity capital? b. What is its WACC? c. If BCCI is presented with a normal project with an internal rate of return of 12%, should it accept the project?

Question

Jenna Wells

Business

26 December, 18:14

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 30% debt, paying a 5% interest rate, and 70% equity. Buildwell pays tax at 40%. (LO13-1) a. What is BCCI's cost of equity capital? b. What is its WACC? c. If BCCI is presented with a normal project with an internal rate of return of 12%, should it accept the project?

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Answers (1)

Know the Answer?

Arjun Jackson · Answer 1

a. 11.2%

b. 8.74%

c. Yes

Explanation:

The computation is shown below:

a. The cost of equity capital is

Cost of equity capital = Risk free rate of return + Beta * Market risk premium

= 4% + 0.9 * 8%

= 4% + 7.2%

= 11.2%

b. Now the WACC is

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of common stock) * (cost of common stock)

= (0.3 * 5%) * (1 - 40%) + (0.7 * 11.2%)

= 0.9% + 7.84%

= 8.74%

c. Yes the project should be accepted as the internal rate of return is greater than the cost of equity capital