Pan American Airlines\' shares are currently trading at $63 88 each The market y

Question

Pan American Airlines' shares are currently trading at $63 88 each The market yeld on Pan Am's debt is 6% and the firm's beta is 0 9 The T-Bill rate is 4% and the expected return on the market is 10% The company's target capital structure is 70% debt and 30% equity Pan American Airlines pays a combined federal and state tax rate of 20% what is the estimated cost of common equity employing the constant growth dividend discount model? Assume that Pan Am pays annual dividends and that the last dividend of $2 25 per share was paid yesterday. Pan Am started paying dividends 6 years ago. The first dividend was $1.39 per share Employing the constant growth dividend discount model, the estimated cost of common equity for Pan Ams % Round tot decimal places

Explanation / Answer

Cost of common equity (r) D1÷P0+g Here, Stock price (P0) $                                63.88 Expected dividend (D1) $                                   2.44 2.25*(1+8.36%) Growth rate (g) 8.36% (2.25/1.39)^(1/6)-1 Cost of common equity (r) 12.17% $2.44/$63.88+8.36%

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