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3 April, 19:36

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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  1. 3 April, 21:59
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    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
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