Theta Airlines has an asset beta of 1.5 and 10 million shares outstanding, now trading at RM 55 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued long-term bonds value at RM 200 million at an interest rate of 7%. Theta pays taxes at a marginal rate of 35%. The risk-free interest rate is 6%.

What is Thetas after-tax WACC?

Estimate the market risk premium and explain what does it show?

The more debt the firm issues, the higher the interest rate it must pay. That is one important reason why firms should operate at conservative debt levels. Do you agree with this statement? Explain.