Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your boss asks you to look at East Africa Airways. It has debt with a book value of $20M, currently trading at 85% of book

Your boss asks you to look at East Africa Airways.  It has debt with a book value of $20M, currently trading at 85% of book value.  It also has book value of equity of $30M, and 2M shared of common stock tracing at $4.75 per share.  What weights should be used for debt ad equity in calculating its WACC? 



Your boss is keen for you to learn more about Airlines.  South American Airlines' (SAA) shares are currently trading at $69.25 each. The yield on the company's 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%.  What is SAA's cost of equity? 



SAA's key rival, Maskati Air 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 Maskati's cost of preferred stock?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

1 The weights used for debt and equity in calculating the WACC of East Africa Airways can be calcula... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Finance

Authors: Jonathan Berk and Peter DeMarzo

3rd edition

978-0132992473, 132992477, 978-0133097894

More Books

Students also viewed these Finance questions

Question

How does one program an FPGA?

Answered: 1 week ago