Flyanair Plc (FP) is listed on the London Stock Exchange. It comprises two divisions, Airline and Car Rental. The Car Rental division is in the process of estimating a discount rate and forecasting cash-flows for a new project. Each division contributes approximately 50% of revenues, costs and profits to FP. Estimates of FPs beta are 1.3 (estimated over 30 days), 1.15 (estimated over 1 year) and 1.4 (estimated over 60 months). FP. has a target Debt to Value ratio of 0.4/1. Estimates of the Equity Risk Premium are 3.65% (estimated over 1 year), 7.85% (estimated over 10 year) and 5.50% (estimated over 75 years).

FP is issuing a 30 year bond next year and if this project is approved, part of the proceeds of this issue will be used to finance the car rental project. It is expected this bond will have a Yield to Maturity at issue of 4.95%. FPs existing debt comprises bonds with maturities ranging from 2 years to 20 years. The weighted average Yield to Maturity on these bonds is 5.1%. The marginal corporation tax rate is 30%.

The following information is also available to you.

UK Listed Companies in the Airline Sector.

Company	Beta	Debt/Value	% of Profit Generated in Airline Industry
FlyQuick Plc.	1.25	0.50	95%
Air and Sea Plc.	1.00	0.65	55%
UK Air Plc.	1.16	0.40	95%

Government Bond Yields

	1 Year	2 Year	5 Year	30 Year
Yield to Maturity	0.95%	1.50%	2.55%	3.00%

Required:

(i) Estimate a Weighted Average Cost of Capital appropriate for the analysis being conducted by the Car Rental Division. Briefly explain and comment on each choice you make about which inputs you use.