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Based upon this information, Budget Wings' current weighted average cost of capital (WACC) is closest to which of the following?

Based upon this information, Budget Wings' current weighted average cost of capital (WACC) is closest to which of the following?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question 23
Budget Wings Airlines is considering upgrading its fleet of aircraft as it expands from a regional airline to one offering service to a more nationwide portfolio of cities and airports. In support of this process, the CFO has asked you to determine the appropriate weighted average cost of capital (WACC) to use in the discounted cash flow analysis. You spend the morning gathering the following information: - Budget Wings has debt outstanding with a market value of $190 million. This debt is in the form of bonds that are currently priced at $946.33 per $1,000 face value and pay a coupon of 3.45%. The current yield-to- maturity (YTM) on these bonds is 4.11%. Budget Wings stock is currently priced at $52.42 per share. You expect that next year's dividend willI be $3.71 and you expect dividends to grow at 4%. The current market value of Budget Wings' common equity is $200 million. - Budget Wings has preferred equity outstanding with a market value of $30 million that offers an annual dividend of $2.91 and is priced at $48.50 per share. - Budget Wings pays corporate taxes at a rate of 35%. Based upon this information, Budget Wings' current weighted average cost of capital (WACC) is closest to which of the following? O A. 5.01% O B. 6.91% O C. 19.75% O D. 7.26% O E. 6.49%
Transcribed Image Text:Budget Wings Airlines is considering upgrading its fleet of aircraft as it expands from a regional airline to one offering service to a more nationwide portfolio of cities and airports. In support of this process, the CFO has asked you to determine the appropriate weighted average cost of capital (WACC) to use in the discounted cash flow analysis. You spend the morning gathering the following information: - Budget Wings has debt outstanding with a market value of $190 million. This debt is in the form of bonds that are currently priced at $946.33 per $1,000 face value and pay a coupon of 3.45%. The current yield-to- maturity (YTM) on these bonds is 4.11%. Budget Wings stock is currently priced at $52.42 per share. You expect that next year's dividend willI be $3.71 and you expect dividends to grow at 4%. The current market value of Budget Wings' common equity is $200 million. - Budget Wings has preferred equity outstanding with a market value of $30 million that offers an annual dividend of $2.91 and is priced at $48.50 per share. - Budget Wings pays corporate taxes at a rate of 35%. Based upon this information, Budget Wings' current weighted average cost of capital (WACC) is closest to which of the following? O A. 5.01% O B. 6.91% O C. 19.75% O D. 7.26% O E. 6.49%
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