HI, PLEASE I NEED SOMEONE TO SOLVE THESE QUESTIONS IN 90 MINUTES. I WILL GIVE 15

Question

HI,

PLEASE I NEED SOMEONE TO SOLVE THESE QUESTIONS IN 90 MINUTES.

I WILL GIVE 1500PTS FOR EACH

SHOW ALL YOUR WORK

Bechtel Construction Company is considering a capital budget of $20,000,000 to build year. Bechtel is able to borrow $5,000,000 at 8% per year and to obtain the rest of the required capital. Bechtel's slock has a Market Premium of 4% and the Riskless investment is set at 6% if the projects tax rate is 40%. what is the WACC for Bechtel? capital budget = 20,000,000 money borrowed 5,000,000 at 8% per year

Explanation / Answer

For this question, you first need to figure the cost of equity and cost of debt.

Cost of equity is given by CAPM formula. Cost of equity = risk free return + beta * (market premium )

Thus cost of equity = 6% + 1.5 (4%) = 12%

Cost of debt is the pre tax cost of debt times the interest shield = cost of debt * (1 - tax rate) = 8% (1-.4) = 4.8%

To figure out the cost of capital for the project, you use WACC which also requires you to figure out the relative proportion of capital funded by equity and debt.

Proportion of debt = 5,000,000 / 20,000,000 = 25%

Proportion of equity must be the rest so 100% - 25% = 75%

Applying WACC = 0.25 * 4.8% (debt proportion and cost of debt) + .75 * 12% (equity proportion and cost of equity) = 10.2% WACC

Please note the response submitted earlier by the other person is incorrect as it does not factor in beta of 1.5.

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