Air Tampa has just been incorporated, and its hoard of directors is currently grappling with the question of optimal capital
a. Estimate the beta of an unlevered firm in the commuter airline business based on Jaxair’s market-determined beta.
b. Now assume that rd = rRF 10% and that the market risk premium RPM = 5%. Find the required rate of return on equity for an unlevered commuter airline.
c. Air Tampa is considering three capital structures: (1) $2 million debt, (2) $4 million debt, and (3) $6 million debt. Estimate Air Tampa’s rs for these debt levels.
d. Calculate Air Tampa’s rs at $6 million debt while assuming its federal-plus-state tax rare is now 40%. Compare this with your corresponding answer to part c.
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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Question Posted: October 15, 2011 05:59:00