Answer to Question #179863 in Finance for Bishem

Question #179863

BMX Ltd. has asked you to determine its current weighted average cost of capital (WACC) and has provided the following information.


BMX has 1 million common shares outstanding that are currently trading at a price of K525 and are expected to pay a dividend of K75 per share this year. The company also has a single K15,000,000 market value long-term debt issue outstanding. The bonds carry an 8% coupon rate. Investment analysts have indicated that BMX’s shares have a beta of 1.30. The market premium is 6.5% and the risk-free return is 2.5 percent. BMX is in the 35% tax bracket.


Required:


Determine BMX’s WACC under the assumption that BMX will finance new projects using returned earnings instead of issuing new common stock.                 



1
Expert's answer
2021-04-13T07:15:14-0400

"WACC = (E\/(E + D)\u00d7Re) + ((D\/(E + D)\u00d7Rd) \u00d7(1 \u2013 T)) = (525,000,000\/(525,000,000+15,000,000))\u00d7(0.025+1.3\u00d7(0.065-0.025))+15,000,000\/540,000,000\u00d70.08\u00d7(1-0.35) = 0.0763."


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