Answers
Answer to Part a.
Cost of Equity = Risk Free Rate + Beta * Market Risk Premium
Cost of Equity = 4% + 0.9 * 6%
Cost of Equity = 9.4%
Answer to Part b.
Before Tax Cost of Debt = 10%
After Tax Cost of Debt = 10% * (1 – 0.40)
After Tax Cost of Debt = 6%
WACC = (Weight of Debt * After Tax Cost of Debt) + (Weight of Equity * Cost of Equity)
WACC = (0.29 * 6%) + (0.71 * 9.4%)
WACC = 8.41%
Answer to Part c.
Yes.
The BCCI should accept the project as WACC of the project is more than Internal rate of return.
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