Question
Pan American Airlines' shares are currently trading at $73.61 each. The market yield on Pan Am's debt is 8 % and the firm's beta is
Pan American Airlines' shares are currently trading at $73.61 each. The market yield on Pan Am's debt is 8 % and the firm's beta is 1.1 . The T-Bill rate is 3.5 % and the expected return on the market is 7.75 %. The company's target capital structure is 50 % debt and 50 % equity. Pan American Airlines pays a combined federal and state tax rate of 25 %. 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 $2.36 per share was paid yesterday. Pan Am started paying dividends 7 years ago. The first dividend was $1.56 per share.
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