What is an estimate of the cost of capital wacc of the


NorthSouth Airlines has been granted permission to fly passengers between major U.S. cities. The new company faces competition from four airlines that operate between the major cities. The betas of the equity of the four major competitors (A, B, C, D) are 2.14, 2.37, 2.81, and 3.17; and the debt-to-equity ratios of these four companies (in the same order: A, B, C, D) are 0.11, 0.28, 0.61, and 0.88. Since the D/E ratios vary, the debt of the airline companies is rated differently with the costs of debt of A, B, C, D being 5.00%, 5.25%, 6.75% and 8.50%, respectively. Suppose the risk-free rate is 3.5% and the expected market risk premium (the average difference between the market return and the risk-free rate) is 5.0%. Assume that the tax rate is 34%, the interest payments on debt are tax deductible and the tax shield on debt is as risky as the assets in the airline business. NorthSouth Airlines has decided to remain an all-equity firm for the foreseeable future. What is an estimate of the cost of capital (WACC) of the company? (No more than two decimals in the percentage but do not enter the % sign.)

Request for Solution File

Ask an Expert for Answer!!
Financial Management: What is an estimate of the cost of capital wacc of the
Reference No:- TGS02747601

Expected delivery within 24 Hours