Question

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.                 

Answer 1

$WACC = (E/(E + D)×Re) + ((D/(E + D)×Rd) ×(1 – T)) = (525,000,000/(525,000,000+15,000,000))×(0.025+1.3×(0.065-0.025))+15,000,000/540,000,000×0.08×(1-0.35) = 0.0763.$