You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 28% debt financed, and you anticipate its debt cost of capital will be 5%. If its corporate tax rate is 37%, what is your estimate of its WACC? The equity cost of capital is %. (Round to one decimal place.) The weighted average cost of capital is %. (Round to one decimal place.)
You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 28% debt financed, and you anticipate its debt cost of capital will be 5%. If its corporate tax rate is 37%, what is your estimate of its WACC? The equity cost of capital is %. (Round to one decimal place.) The weighted average cost of capital is %. (Round to one decimal place.)
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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![### Estimating the Weighted Average Cost of Capital (WACC)
In this exercise, we will estimate the weighted average cost of capital (WACC) for a new airline business. Several pieces of information are provided to help you make this calculation:
- **Unlevered Cost of Capital:** 9%
- **Proportion of Debt Financing:** 28%
- **Debt Cost of Capital:** 5%
- **Corporate Tax Rate:** 37%
#### Steps to Estimate WACC:
1. **Determine the Equity Cost of Capital:**
- The first value to calculate is the equity cost of capital.
- Use the provided unlevered cost of capital figure as part of your calculations.
- Round the result to one decimal place.
2. **Calculate WACC:**
- Using the equity cost of capital determined in the previous step, and incorporating the debt cost of capital, debt financing proportion, and corporate tax rate, calculate the WACC.
- Round the final weighted average cost of capital to one decimal place.
#### Inputs Required:
- **Equity Cost of Capital:**
- Input the calculated equity cost of capital rounded to one decimal place. [______] %
- **Weighted Average Cost of Capital (WACC):**
- Input the calculated WACC rounded to one decimal place. [______] %
By following these steps, you can accurately estimate the WACC for the new airline business with the given financial parameters.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4d4a33cb-12a6-4e60-abda-fe573a8a1543%2Fb1cdd225-3288-44a9-b21d-76900b9282e8%2F8u7jquq.png&w=3840&q=75)
Transcribed Image Text:### Estimating the Weighted Average Cost of Capital (WACC)
In this exercise, we will estimate the weighted average cost of capital (WACC) for a new airline business. Several pieces of information are provided to help you make this calculation:
- **Unlevered Cost of Capital:** 9%
- **Proportion of Debt Financing:** 28%
- **Debt Cost of Capital:** 5%
- **Corporate Tax Rate:** 37%
#### Steps to Estimate WACC:
1. **Determine the Equity Cost of Capital:**
- The first value to calculate is the equity cost of capital.
- Use the provided unlevered cost of capital figure as part of your calculations.
- Round the result to one decimal place.
2. **Calculate WACC:**
- Using the equity cost of capital determined in the previous step, and incorporating the debt cost of capital, debt financing proportion, and corporate tax rate, calculate the WACC.
- Round the final weighted average cost of capital to one decimal place.
#### Inputs Required:
- **Equity Cost of Capital:**
- Input the calculated equity cost of capital rounded to one decimal place. [______] %
- **Weighted Average Cost of Capital (WACC):**
- Input the calculated WACC rounded to one decimal place. [______] %
By following these steps, you can accurately estimate the WACC for the new airline business with the given financial parameters.
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