Question
Pan American Airlines' shares are currently trading at $58.75 each. The market yield on Pan Am's debt is 4% and the firm's beta is 0.8.
Pan American Airlines' shares are currently trading at $58.75 each. The market yield on Pan Am's debt is 4% and the firm's beta is 0.8. The T-Bill rate is 3.75% and the expected return on the market is 7.75%. The company's target capital structure is 35% debt and 65% equity. Pan American Airlines pays a combined federal and state tax rate of 35%. What is the estimated cost of common equity, employing the constant growth dividend discount model? Assume that Pan Am pays annual dividends and that the last dividend of $2.21 per share was paid yesterday. Pan Am started paying dividends 3years ago. The first dividend was $1.59per share.
Employing the constant growth dividend discount model, the estimated cost of common equity for Pan Am is
nothing
%.
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