JTM Airlines, a privately held firm is looking to buy additional gates at its home airport for $1,200,000. It has money in the bank, but that money may not be spent as it is used to pay salaries suppliers, and equipment. It asked its bank for a loan, but the bank refused unless the project had a return higher than JTM's weighed average cost of capital Separately, PAN Airways' CEO approached JTM's CEO to sell the airline. As a result of all this, JTM has contracted you to 1. Calculate JTM's weighed average cost of capital (WACC) based on two airlines trading in the capital markets - PDM and GAL. Since JTM does not trade, it has no beta, so you need to use these two firms as proxies. JTM's CFO kindly gave you the necessary information on PDM and GAL for you to do this with some assumptions for the combined entity too. A1 B PDM 22.00 2.20 10.00 16.00 160 200 360 56% 44% 1.00 0.44 GAL 25.00 1.90 13.16 17.00 224 100 324 31% 69% 1.05 0.73 0.59 9 1 Component 2 Net Income (M$) 3 Earnings per share 4 # of shares (M) 5 Price per share 6 Market Value - Equity (M) 7 Market Value - Debt (M) 8 Market Value - Total (M) - % Debt 10 - % Equity 11 Beta (levered) 12 Beta (unlevered) 13 Average Beta (unlevered) 14 15 Values for combined JTM/PAN Airways: 16 % Debt 17 % Equity 18 Beta (relevered) 19 Risk free rate 20 Market risk premium 21 Expected equity return (CAPM) 22 Expected cost of debt 23 Tax rate 24 Weighed average cost of capital (WACC) 25 45.0% 55.0% 1.06 2.0% 5.5% 5.5% 21.0%