Business, 19.10.2021 01:00 iseestars3748
Air Tampa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter air services between Tampa and smaller surrounding cities. Jaxair has been around for a few years, and it has about the same basic business risk as Air Tampa would have. Jaxair's market-determined beta is 1.7, and it has a current market value debt ratio (total debt to total assets) of 50% and a federal-plus-state tax rate of 40%. Air Tampa expects to be only marginally profitable at start-up; hence its tax rate would only be 20%. Air Tampa's owners expect that the total book and market value of the firm's stock, if it uses zero debt, would be $9 million. Air Tampa's CFO believes that the MM and Hamada formulas for the value of a levered firm and the levered firm's cost of capital should be used because zero growth is expected.
Required:
a. Estimate the beta of an unlevered firm in the commuter airline business based on Jaxair’s market-determined beta.
b. Now assume that rd= rRF = 10% and that the market risk premium RPM = 5%. Find the required rate of return on equity for an unlevered commuter airline.
c. Air Tampa is considering three capital structures: (1) $2 million debt, (2) $4 million debt, and (3) $6 million debt. Estimate Air Tampa’s rs for these debt levels.
d. Calculate Air Tampa’s rs at $6 million debt while assuming its federal-plus-state tax rate is now 40%. Compare this with your corresponding answer to part c. d.
Answers: 2
Other questions on the subject: Business
Business, 21.06.2019 19:10, ebonsell4910
King fisher aviation is evaluating an investment project with the following case flows: $6,000 $5,500 $7,000 $8,000 discount rate 14 percent what is the discounted payback period for these cash flows if the initial cost is 15,000? what if the initial cost is $12,000? what if the cost is $16,000?
Answers: 1
Business, 21.06.2019 23:30, nicollexo21
San ruiz interiors provides design services to residential and commercial clients. the residential services produce a contribution margin of $450,000 and have traceable fixed operating costs of $480,000. management is studying whether to drop the residential operation. if closed, the fixed operating costs will fall by $370,000 and san ruiz’ income will
Answers: 3
Business, 22.06.2019 03:30, jadahilbun01
Instructions: use the following information to construct the 2000 balance sheet and income statement for carolina business machines. round all numbers to the nearest whole dollar. all numbers are in thousands of dollars. be sure to read the whole problem before you jump in and get started. at the end of 1999 the firm had $43,000 in gross fixed assets. in 2000 they purchased an additional $14,000 of fixed asset equipment. accumulated depreciation at the end of 1999 was $21,000. the depreciation expense in 2000 is $4,620. at the end of 2000 the firm had $3,000 in cash and $3,000 in accounts payable. in 2000 the firm extended a total of $9,000 in credit to a number of their customers in the form of accounts receivable. the firm generated $60,000 in sales revenue in 2000. their cost of goods sold was 60 percent of sales. they also incurred salaries and wages expense of $10,000. to date the firm has $1,000 in accrued salaries and wages. they borrowed $10,000 from their local bank to finance the $15,000 in inventory they now have on hand. the firm also has $7,120 invested in marketable securities. the firm currently has $20,000 in long-term debt outstanding and paid $2,000 in interest on their outstanding debt. over the firm's life, shareholders have put up $30,000. eighty percent of the shareholder's funds are in the form of retained earnings. the par value per share of carolina business machines stock is
Answers: 3
You know the right answer?
Air Tampa has just been incorporated, and its board of directors is grappling with the question of o...
Questions in other subjects:
Mathematics, 21.12.2019 03:31
Mathematics, 21.12.2019 03:31
Mathematics, 21.12.2019 03:31
Health, 21.12.2019 03:31
Arts, 21.12.2019 03:31
