To Shilpa Kotecha, please answer the question in previous assignment. The yield to maturity on LA debt currently is 6%. †LA has 10 million shares outstanding, with a market price of $10 a share. LA's equity beta is estimated at 1.25, the market risk premium is 8%, and the Treasury bill rate is 3%.
(a).Illustrate how the company can more dividends to shareholders.
(b).Explain dividend irrelevant theory in this case.
(c).Calculate WACC (use market value).
(d).How to argue ''Why should we want to sell more equity when our stock has fallen over the past year by nearly a fifth? Our stock is currently offering a dividend yield of 6.5%, which makes equity an expensive source of capital.'' ?
(e). How to argue ''Our equity currently has a book value of $12 a share; it's not playing fair by our existing shareholders if we now issue stock for around $10 a share. '' ?
(f).How to argue ''We can borrow today at 6%. We get a tax break on the interest, so the after-tax cost of borrowing is .65 × 6 = 3.9%. That's about half the cost of equity. We expect to earn a return of 15% on these new aircraft. If we can raise money at 3.9% and invest it at 15%, that's a good deal in my book. ''? RE(1-t)=3.9% IRR=15%
(g).Issue stock may effect the management?Any suggestion to improve the problem?