The common stock of Conservation & Construction, Inc. (CCI) has a beta of .8. The Treasury bill
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Question:
The common stock of Conservation & Construction, Inc. (CCI) has a beta of .8. The Treasury bill rate is 4% and the market risk premium is estimated at 7%. CCI’s capital structure is 30% debt paying a 5% interest rate, and 70% equity.
Required: What is CCI’s cost of equity capital and WACC? Assume CCl’s tax rate is 35%.
r_{e} = r_{f} + beta *(r_{m} - r_{f})
r_{e} = 0.04 + 0.8 *0.07
r_{e} =0.096 = 9.6%
WACC = w_{d}*r_{d}*(1-t) + w_{e}*r_{e}
WACC = 0.3*0.05*(1-0.35) + 0.7*0.096
WACC = 0.07695 = 7.695%
CCI is evaluating a project with an internal rate of return of 12%.
Required: Based on the data given and your computations in part A, should CCI accept the project? If the project will generate a cash flow of $100,000 per year for 7 years, what is the most CCI should be willing to pay to initiate the project?
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0078034640
7th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
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