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The common stock of Bulldwell Conservation & Construction Inc
The common stock of Bulldwell Conservation & Construction Inc. (BCC) has a beta of 0.9. The Treasury bill rate is 4%, and the market risk premium is estimated at 10% BCCI's capital structure is 20% debt, paying an interest rate of 7%, and 80% equity. The debt sells at par Buildwell pays tax at 21% a. What is BCCI's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. What is its WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. If BCCI is presented with a normal project with an internal rate of return of 12%, should it accept the project if it has the same level of risk as the current firm? a. Cost of equity capital b. WACC c. Accept the project 1% %
Expert Solution
Cost of Equity Capital = Rf + Beta*(Rm-Rf)
= 4% + 0.9*(10%)
= 4% + 9%
= 13%
Cost of Debt (After Tax) = Interest Rate*(1-Tax Rate) = 7%*(1-21%) = 5.53%
WACC = (20%*5.53%)+(80%*13%) = 11.51%
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