Maersk Line is a world-wide container shipping company. It is considering entering the AirTransport business and desires to estimate its cost of capital for air transport projects. Assume the debt betas for all firms are zero and that there are no personal taxes or bankruptcy costs (or other capital market imperfections besides corporate taxes).

Maersk managers have collected the following corporate players to analyze:

The market conditions are such that r_f=3% and the expected market risk premium is 7%.  Maersk has a target leverage ratio of 30% and a tax rate of T=35%. 

 

Calculate the WACC appropriate for Maersk projects in the Air Transport industry.

Transcribed Image Text:

Players D/V BE -% of Assets- Ground Transport Air Transport Tax Rate FedEx 40% 1.0 60% 40% 35% UPS 50% 1.7 40% 60% 35% Players D/V BE -% of Assets- Ground Transport Air Transport Tax Rate FedEx 40% 1.0 60% 40% 35% UPS 50% 1.7 40% 60% 35%

Answer rating: 100% (QA)

Calculating WACC for Maersks Air Transport Projects Heres how to calculate the Weighted Average Cost ... View the full answer