Budget Wings Airlines is considering upgrading its fleet of aircraft as it expands from a regional airline to one offering service to a more nationwide portfolio of cities and airports. In support of thisprocess, the CFO has asked you to determine the appropriate weighted average cost of capital (WACC) to use in the discounted cash flow analysis. You spend the morning gathering the followinginformation:

- Budget Wings has debt outstanding with a market value of

$180

million.

This debt is in the form of bonds that are currently priced at $946.33 per $1,000 face value and pay a coupon of 3.45%. The current yield-to- maturity (YTM) on these bonds is 4.11%.- Budget Wings stock is currently priced at

$53.09

per share. You expect that next years dividend will be

$3.65

and you expect dividends to grow at

5%.

The current market value of Budget Wings common equity is

$210

million.

- Budget Wings has preferred equity outstanding with a market value of $30 million that offers an annual dividend of $2.91 and is priced at $48.50 per share.

- Budget Wings pays corporate taxes at a rate of 35%.

Question content area bottom

Part 1

Based upon this information, Budget Wings current weighted average cost of capital (WACC) is closest to which of the following?

A.

20.55%

B.

7.84%

C.

7.51%

D.

7.11%

E.

5.01%