1. 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 27 % debt financed, and you anticipate its debt cost of capital will be 6 % If its corporate tax rate is 36 %, what is your estimate of its WACC?
2. Unida Systems has 41 million shares outstanding trading for $ 8 per share. In addition, Unida has $ 108 million in outstanding debt. Suppose Unida's equity cost of capital is 16 %, its debt cost of capital is 7 %, and the corporate tax rate is 34 %.
a. What is Unida's unlevered cost of capital?
b. What is Unida's after-tax debt cost of capital?
c. What is Unida's weighted average cost of capital?