ABC airlines has been granted permission to fly passengers between major U.S. cities. The new company faces competition from four airlines that

operate between the major cities. The betas of the equity of the four major competitors (A, B, C, D) are 1.63, 1.79, 1.97, and 2.13; and the debt-to-equity

ratios of these four companies (in the same order: A, B, C, D) are 0.14, 0.30, 0.49, and 0.66. Although these D/E ratios vary, all airline debt is rated the same.

Suppose the yield on airline debt is 8.5%, the risk-free rate is 4.5% and the expected market risk premium (the average di erence between the market

return and the risk-free rate) is 7.5%. What is the cost of capital (or discount rate) in percentage that you should use in valuing ABC airlines? (Allow

two decimals in the percentage but do not enter the % sign.)

The answer should have a detailed workout