The common stock of Buildwell Conservation & Construction Inc. (BCCI) has a beta
ID: 2717328 • Letter: T
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 8%. BCCI’s capital structure is 30% debt, paying an interest rate of 5%, and 70% equity. The debt sells at par. Buildwell pays tax at 40%.
What is BCCI’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
What is its WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
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 an interest rate of 5%, and 70% equity. The debt sells at par. Buildwell pays tax at 40%.
Explanation / Answer
a.) BCCI’s cost of equity capital :-
= Risk free return + Beta * Market risk premium
= 4 + 0.9 * 8
= 11.2%
b.) WACC
Partculars
Weight (a)
Cost (b)
(a)* (b)
Debt
0.30
3 % (NOTE 1)
0.9
Equity
0.70
11.2 %
7.84
Total
1
8.74%
(NOTE 1):- Cost of Debt = 5 (1 – 0.40) = 3%
Conclusion:-
a.BCCI’s cost of equity capital = 11.2%
b.WACC = 8.74%
Partculars
Weight (a)
Cost (b)
(a)* (b)
Debt
0.30
3 % (NOTE 1)
0.9
Equity
0.70
11.2 %
7.84
Total
1
8.74%