Question
Pan American Airlines' shares are currently trading at $71.62 each. The market yield on Pan Am's debt is 8% and the firms beta is 1.1.
Pan American Airlines' shares are currently trading at $71.62 each. The market yield on Pan Am's debt is 8% and the firms beta is 1.1. The T-Bill rate is 3.5% and the expected return on the market is 8%. The company's target capital structure is 70% debt and 30% equity. Pan American Airlines pays a combined federal and state tax rate of 40%. 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 $2.35 per share was paid yesterday. Pan Am started paying dividends 6 years ago. The first dividend was $1.67 per share.
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