Question
The capital structure of Global Airlines is 70% common stock, 20% preferred stock, and 10% long term (10 year) debt. The risk premium of Globals
The capital structure of Global Airlines is 70% common stock, 20% preferred stock, and 10% long term (10 year) debt. The risk premium of Globals stock is 13%, the risk free rate is 2.5%
Global airlines credit rating is A-; spread of 10 year A- rated corporate debt = 3.5%; yield to maturity pf US 10-year treasury bonds = 5.5%. Global Airlines effective tax rate is 25%
The company recently issued preferred stock with a par value of $60/share and pays a $9 dividend yield. Issuance costs were 5% of par.
a. What is Global Airlines cost of equity?
b. What is Global Airlines after-tax cost of debt?
c. What is Globals cost of preferred stock?
d. Company wants to expand operations to Cuba, calculate the companys WAAC.
e. Globals analysts estimate the internal rate of return of the expansion to Cuba is 15%. If they finance the project using only equity should management proceed with the project? Why or why not?
f. If the frim finances the expansion using all three sources of financing in the proportions stated (i.e. WAAC), should it proceed with the project? Why or why not?
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