Air Tampa

Business and Financial Risk MM Model product line Tampa has overflowing been incorpo considerd, and its board of directors is currently grappling with the question of optimal crown structure. The company plans to offer commuter train propagate services mingled with Tampa and smaller surrounding cities. Jaxair has been around for a few years, and it has intimately the same business run a insecurity as business Tampa would have. Jaxairs market- determined of import is 1.8, and it has a current market comfort debt ratio (total debt/total assets) of 50%  and a federal-plus-state tax appreciate of 40%. Air Tampa expects solo to be marginally paying at start-up; hence its tax rate would only be 25%. Air Tampas owners expect that the total daybook and market determine of the theaters stock, if it uses zero debt, would be $10 cardinal. Air Tampas CFO believes that the MM and Hamada formulas for the value of a levered rigid and the levered firms cost of pileus sho uld be used. a) gauge the beta of an unlevered firm in the commuter airline business ground on Jaxairs market-determined beta. (Hint: Jaxairs market-determined beta is a leveraged beta. expenditure Equation:  b = bU[1 + (1 T) (D/S)], past solve for bU ). b) Now contain that rd = rRF = 10% and the market risk premium, RPM, is 5 percent. Find the required rate of return on equity for an unlevered commuter airline.

c) Air Tampa is considering three capital structures: (1) $2 million dollar debt, (2) $4 million dollar debt, and (3) $6 million dollar debt. Estimate Air Tampas rs for these debt levels. d) organize Air Tampas rs at $6 million deb! t expect its federal-plus-state tax rate is straight off 40%. Compare this with your identical answer to part c. (Hint: The growing in the tax rate causes VU to drop to $8 million.) a) bL = bU[1 + (1 T) (D/S)] bU = bL / [1 + (1 T) (D/S)] = 1.8/ [1 + (1 0.40) (0.5/0.5)] = 1.125 b) rsU = rRF + bU(RPM) = 10% + 1.125(5%) = 15.625% c)at $2 million debt VL = VU + TDVL = D + S => 10.5 = 2 + S = 10 mill....If you want to take away a full essay, order it on our website: BestEssayCheap.com

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