Determine what the optimum capital structure is for Delta Airlines.

You will use Hamada's Equation to recalculate the levered betas based on the weights that you choose.

 

Where can I find or how do I calculate the "RED" inputs in the following excel image?

 I have to calculate the following:

 Other possibly relevant info:

 

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The optimal capital structure is the one that maximizes the value of the company. Also, that same capital structure minimizes the WACC. We begin by estimating how capital structure affects the costs of debt and equity. The effects on debt are usually estimated by talking with bankers and investment bankers. Discussions with its bankers indicate that Strasburg can borrow different amounts, but the more it borrows, the higher the cost of its debt. Note: the percentages are based on market values. Estimating Optimal Capital Structure (Millions of Dollars) 1. Ws 2. d 3. b 4. Ts 5. (1-T) 6. WACC Notes: 10% 90.00% 3.64% 0.65 6.55% 2.56% 6.15% 15% 85.00% 3.00% 0.67 6.71% 2.11% 6.02% Percent of Firm Financed with Debt (wa) 20% 25% 80.00% 3.26% 0.71 6.90% 5. The after-tax cost of debt is ra (1-T), where T = 39%. 6. The weighted average cost of capital is calculated as: WACC = Ws fs + Ward (1-T). 2.30% 5.98% 1. The percent financed with equity is: W = 1 - Wa 2. The interest rate on debt, rd, is obtained from investment bankers. 3. The levered beta is estimated using Hamada's formula, and unlevered beta of by = x and a tax rate of 39% : b = bu [1 + (1-T) (W/W)]- 4. The cost of equity is estimated using the CAPM formula with a risk-free rate of 2.87% and a market risk premium of 6.54%: rs = TRF + (RPM)b. 75.00% 3.50% 0.74 7.11% 2.46% 5.95% 30% 70.00% 4.00% 0.78 7.35% 2.82% 5.99% 35% 65.00% 5.00% 0.83 7.63% 3.52% 6.19% 40% 60.00% 3.08% 0.88 7.96% 2.17% 5.64% The optimal capital structure is the one that maximizes the value of the company. Also, that same capital structure minimizes the WACC. We begin by estimating how capital structure affects the costs of debt and equity. The effects on debt are usually estimated by talking with bankers and investment bankers. Discussions with its bankers indicate that Strasburg can borrow different amounts, but the more it borrows, the higher the cost of its debt. Note: the percentages are based on market values. Estimating Optimal Capital Structure (Millions of Dollars) 1. Ws 2. d 3. b 4. Ts 5. (1-T) 6. WACC Notes: 10% 90.00% 3.64% 0.65 6.55% 2.56% 6.15% 15% 85.00% 3.00% 0.67 6.71% 2.11% 6.02% Percent of Firm Financed with Debt (wa) 20% 25% 80.00% 3.26% 0.71 6.90% 5. The after-tax cost of debt is ra (1-T), where T = 39%. 6. The weighted average cost of capital is calculated as: WACC = Ws fs + Ward (1-T). 2.30% 5.98% 1. The percent financed with equity is: W = 1 - Wa 2. The interest rate on debt, rd, is obtained from investment bankers. 3. The levered beta is estimated using Hamada's formula, and unlevered beta of by = x and a tax rate of 39% : b = bu [1 + (1-T) (W/W)]- 4. The cost of equity is estimated using the CAPM formula with a risk-free rate of 2.87% and a market risk premium of 6.54%: rs = TRF + (RPM)b. 75.00% 3.50% 0.74 7.11% 2.46% 5.95% 30% 70.00% 4.00% 0.78 7.35% 2.82% 5.99% 35% 65.00% 5.00% 0.83 7.63% 3.52% 6.19% 40% 60.00% 3.08% 0.88 7.96% 2.17% 5.64%

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To determine the optimum capital structure for Delta Airlines we need to calculate the weighted aver... View the full answer