You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 8%. However, the new business will be 28% debt financed, and you anticipate its debt cost of capital will be 7%. If its corporate tax rate is 39%, what is your estimate of its WACC? *** The equity cost of capital is%. (Round to one decimal place.)

You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 8%. However, the new business will be 28% debt financed, and you anticipate its debt cost of capital will be 7%. If its corporate tax rate is 39%, what is your estimate of its WACC? *** The equity cost of capital is%. (Round to one decimal place.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 21P

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During the past few years, Super Technologies has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. As the assistant to the financial vice-president, it is your task is to estimate Super’s weighted average cost of capital (WACC). The VP has provided you with the following information: The firms’ tax rate is 40%. The current market price of Super’s outstanding bonds is $1,153.72. The bonds have an annual coupon rate of 12% and make coupon payments semiannually. The bonds mature in 15 years and have a par value of $1,000. The current price of the firm’s preferred stock is $113.10 per share. The stock has a $100 par value and a 10% annual dividend rate (paid annually). The current price of the firm’s common stock is $50 per share.…
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