NorthSouth Airlines has been granted permission to fly passengers between major U.S. cities. The new company faces

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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 1.63, 1.79, 1.97, and 2.13; and the debt-to-equity ratios of these four companies (in the same order: A, B, C, D) are 0.14, 0.30, 0.49, and 0.66. Although these D/E ratios vary, all airline debt is rated the same. Suppose the yield on airline debt is 8.5%, the risk-free rate is 4.5% and the expected market risk premium (the average difference between the market return and the risk-free rate) is 7.5%. What is the cost of capital (or discount rate) in percentage that you should use in valuing NorthSouth Airlines? (Allow two decimals in the percentage but do not enter the % sign.)
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Smith and Roberson Business Law

ISBN: 978-0538473637

15th Edition

Authors: Richard A. Mann, Barry S. Roberts

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