Argo Airlines, a privately held firm, is looking to buy additional gates at its home airport for $500,000. Argo has $150,000 in the bank but that money may not be spent as it is used to pay salaries, suppliers, and equipment. Argo asked its bank for a loan but the bank refused saying that Argo's interest-bearing debt to equity was too high at 3.1. The bank said that Argo needed to lower that ratio below 2.0 in order to get the loan. Separately, SkyBlue Airlines has approached Argo to see if Argo will buy it. Argos CFO hired you to help with the following tasks: 1. Calculate Argo's cost of capital based on two airlines trading in the capital markets, Eastern and Western. Since Argo does not trade, it has no beta, so you need to use Eastern and Western as proxies. PLEASE ANSWER IT IN EXCEL AND SHOW THE FORMULAS.

B F G 3 K L M N O O S U 14 1 2 3 5 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Component 1 Net Income (M5) 2 Eamings per share 3 # of shares (M) 4 Price per share 5 Market Value - Equity (M) 6 Market Value - Debt (M) 7 Market Value - Total (M) 8 -% Debt 9 % Equity 10 Beta (levered) 11 Beta (unlevered) 12 Average Beta (unlevered) D E Eastern Western Source 19.50 22.00 Given 0.90 1.45 Given 21.67 15.17 Net Income Eamings per share 14.00 19.00 Given 303 288 # of shares x Price per share 256 85 Given 559 373 Market Value - Debt-Equity 46% 23% Market Value - Debt/Market Value - Total 549 779 1-% Debt 105 0.94 Given 0.37 0.73 Beta (levered) 2 % Equity 0.65 Average Values for combined Apache/SkyBlue airline 9 Debt 36.0% % Equity 64,096 Beta (relevered) 1.01 Risk free rate 2.39 Market nisk premium 5.5% Expected equity retum 7.896 Expected cost of debt 3.596 Tax rate 21.09 WACC Given 1 - Debt Average Beta (unlevered)/%Equity Assumption Historical figure CAPM calculation Given Statutory rate Weighed average of costs of equity and debt 23 241