You would like to estimate the weighted average cost of capital for a new airlin

Question

You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 8%. However, the new business will be 23% debtfinanced, and you anticipate its debt cost of capital will be 5%. If its corporate tax rate is 40%, what is your estimate of its WACC?

1. The equity cost of capital is %? (Round to one decimal place)

2. The weighted average cost of capital is %? (Round to one decimal place)

Explanation / Answer

Ru = 8% = 77% Re + 23% Rd = 77% Re + 23%(5%)

Re = (8% – 23%(5%))/75% = 9.13%

Rwacc = 77%(9.13%) + 23%(5%)(1 – 40%) = 7.74%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.