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

Question

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 7%. BCCI’s capital structure is 28% debt, paying an interest rate of 5%, and 72% 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.) Cost of equity capital ____ %

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 12%, should it accept the project if it has the same level of risk as the current firm?

Explanation / Answer

cost of equity capital = 4% + 0.9*7% = 10.30%

WACC = 0.72*10.30% + 0.28*5%*0.6 = 8.26%

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