Business and Finandal Risk-NM Model Air Tompa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter alt services between Tampa and smaller surrounding dities. Alr Tampa believes it would have the same business risk as Jaxal, which is an airline that has been around for a few years and that has had zero growthJaxair's market-determined beta is 2, and it has a current market value debt ratio (total debt to total assets) of 55% and a federal-plus-state tax rate of 25%. Air Tampa expects to have investment tax credits when it begins business, which reduces its federal-plus-state tax rate to 20%. Alr Tampa's owners expect that the total book and market value of the firm's stock, if it uses zero debt would be $15 million Air Tampa's CFO believes that the MM and Hamada formulas for the value of a levered firm and the levered firm's cost of capital should be used because zero growth is expected a. Estimate the bets of an unlevered firm in the commuter airline business based on Jaxall's market determined beta. Do not round intermediate calculations, Round your answer to three decimal places b. Now assume that en 10% and that the market risk premium RPM - 4%. Find the required rate of return on equity for an unlevered commuter airline. Do not round Intermediate calculations. Round your answer to three decimal places. c. Air Tampals considering three capital structures: (1) 3 million debt, (2) $6 millon debt, and (3) 89 million debt. Estimate Alf Tampa's r, for these debt levels. Do not round intermediate calculations. Round your answers to two decimal places 1. Ar Tampa's for $3 million debti % 2. Air Tampo's refor $6 million debt: 3. Air Tampo's is for $9 million debti d. Suppose Air Tampa's investment tax credits expire, causing it to have a 25% federal-plus-state tax rate. Calculate Ar Tampa's9 million debt using the new tax rate. (Hint: The Increase in the tax rate causes Vy to drop to $14,0625 milikon.) Do not round intermediate calculations. Round your answer to two decimal places Compare this with your corresponding answer to Parte (Assume that growth is zero and no personal taxes for the MM.) The levered beta will select EBIT remains constant Business and Finandal Risk-NM Model Air Tompa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter alt services between Tampa and smaller surrounding dities. Alr Tampa believes it would have the same business risk as Jaxal, which is an airline that has been around for a few years and that has had zero growthJaxair's market-determined beta is 2, and it has a current market value debt ratio (total debt to total assets) of 55% and a federal-plus-state tax rate of 25%. Air Tampa expects to have investment tax credits when it begins business, which reduces its federal-plus-state tax rate to 20%. Alr Tampa's owners expect that the total book and market value of the firm's stock, if it uses zero debt would be $15 million Air Tampa's CFO believes that the MM and Hamada formulas for the value of a levered firm and the levered firm's cost of capital should be used because zero growth is expected a. Estimate the bets of an unlevered firm in the commuter airline business based on Jaxall's market determined beta. Do not round intermediate calculations, Round your answer to three decimal places b. Now assume that en 10% and that the market risk premium RPM - 4%. Find the required rate of return on equity for an unlevered commuter airline. Do not round Intermediate calculations. Round your answer to three decimal places. c. Air Tampals considering three capital structures: (1) 3 million debt, (2) $6 millon debt, and (3) 89 million debt. Estimate Alf Tampa's r, for these debt levels. Do not round intermediate calculations. Round your answers to two decimal places 1. Ar Tampa's for $3 million debti % 2. Air Tampo's refor $6 million debt: 3. Air Tampo's is for $9 million debti d. Suppose Air Tampa's investment tax credits expire, causing it to have a 25% federal-plus-state tax rate. Calculate Ar Tampa's9 million debt using the new tax rate. (Hint: The Increase in the tax rate causes Vy to drop to $14,0625 milikon.) Do not round intermediate calculations. Round your answer to two decimal places Compare this with your corresponding answer to Parte (Assume that growth is zero and no personal taxes for the MM.) The levered beta will select EBIT remains constant
