Abbee Aviation (AV) has 40 million shares of stock outstanding, that trade at $40. The risk-free interest

Question:

Abbee Aviation (AV) has 40 million shares of stock outstanding, that trade at $40. The risk-free interest rate is 2% and the market risk premium is 8.9%. This stock has a beta of 2.7. AV also has $400 million in 9% bonds outstanding and the company has a 42% tax rate. Show all calculations for each of your answers to earn full credit.

Part 1: a) Calculate the firm's market capitalization and then calculate the enterprise value. b) Use the CAPM formula to determine the firm's cost of equity, and c) Utilize this information to calculate AV's weighted average cost of capital.

Part 2: a) Assume that Abbee Aviation issues $200 million in bonds to buy back $200 million in common stock in order to recapitalize the firm. What is AV's new WACC? b) Finally, discuss why there is a change in WACC and explain the impact of the components of capital structure on a company's cost of capital

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...