Question
South American Airlines' (SAA) shares are currently trading at $69.25 each. The yield on the companys debt is 4% and the firm's beta is 0.7.
South American Airlines' (SAA) shares are currently trading at $69.25 each. The yield on the companys debt is 4% and the firm's beta is 0.7. The T-Bill rate is 4% and the expected return on the market (E (kM)) is 9%. The company's target capital structure is 25% debt and 75% equity. The company pays a combined income tax rate of 35%. The GST rate is 13%. A) What is SAAs cost of equity? B) Using the information outlined above calculate SAAs cost of debt (after tax). C) What is SAAs weighted average cost of capital? D) What does SAAs weighted average cost of capital mean? Describe it in your own words E) SAAs key rival, Andrew Airlines has a 7 percent preferred stock outstanding that is currently selling for $48 a share. The preferred stock has a $100 par value. The market rate of return is 10 percent and the firm's tax rate is 34 percent. GST is 13%. What is the Andrews cost of preferred stock?
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