Question

Answer Part B

Part A 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%. CCIs capital structure is 30% debt paying a 5% interest rate, and 70% equity. Required: What is CCIs cost of equity capital and WACC? Assume CCls 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\%

Part B 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?

Part A 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%. CCIs capital structure is 30% debt paying a 5% interest rate, and 70% equity. Required: What is CCIs cost of equity capital and WACC? Assume CCls tax rate is 35%. Part B 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?