Alaska airlines fundamental analysis is to be done as 12/31/2011! At that time,
ID: 2794885 • Letter: A
Question
Alaska airlines fundamental analysis is to be done as 12/31/2011! At that time, they had 35,474,775 shares of stock outstanding and 2,391,747 shares in treasury stock. With the annual report for 2011, Alaska Airlines stated that they have not paid a dividend in twenty years and had no intention to commence one in the near future. The stock price was $75.09. Long-term treasury bonds offered 2.55% and long-term corporate bonds with their credit rating offered 6.21%. Assume the market risk premium is 8.70%. Also, assume that all of the debt can be considered to be in the form of a 6.75% coupon bond that was issued on 02/15/2006 and will mature on 02/15/2021. The best estimate of the beta is 0.89. Corporate tax rate is 38% This is part of a bigger problem. I just need the Weighted Average Cost of Capital Please work in excel and show your work. (note: you can get the prices of stock and bonds using the info provided. You can use these prices for the weights) Thank you
Explanation / Answer
WACC = cost of equity * weight of equity + cost of debt * (1-t) * weight of debt
Cost of equity
r (E) = rf + Beta * market risk premium
= 2.55% + (0.89*8.7%)
= 10.3%
Cost of debt = Yield on bond * (1-t)
= 6.21% *(1-0.38)
= 3.85%
Total Equity = price of share * number of shares
= $75.09*35474775
= $2,663,800,854.7
Total debt = price of bond * number of bonds
Price of bond = c* f * ([1-(1+r)-t] / r) + F / (1+r)^t
= 6.75% * 1000 * ([1-(1+0.0621)-15] / 0.0621) + 1000 / (1+0.0621)^15
= 67.5 * 9.58 + 405.05
= 646.67 + 405.05
= $ 1051.73
Total value of debt = 1051.73* 2391747
= $ 2,515,481,526.56
Weighted cost of capital
hence, the WACC of Alaska Airlines is 7.16%
Value Weights Cost of capital Weigheted cost Equity 2,66,38,00,854.75 0.51 10.3% 0.0529388 Debt 2,51,54,81,526.56 0.48 3.85% 0.0186997 Total 5,17,92,82,381.31 1 7.16%Related Questions
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