Air North has thefollowing balance as of today:
Bond coupon rate=8%;coupon paymentannual;Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â ($million)
Remaining term tomaturity= 15 years and the
Face value of eachbond=$1000)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 10
Common stock:
-Shares outstanding(#5,000,000)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 6
-RetainedEarnings                                                                                         8
The yield to maturityof a new 15-year bond which is of similar risk as that of AirNorth's currently outstanding bond is 12%. Air North can issue thisnew bond at par of $1,000. Common stock can be issued to theexisting shareholders at $18 per share which represents an 11.11%discount from the prevailing market price. Beta of the stock of thefirm is 1.4 while the risk free rate and the expected rate ofreturn on the market portfolio are 6% and 14% respectively.Earnings per share at the end of the year are anticipated to be $3.Air North's tax rate is 25%.
Find:
i)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Thecost of capital to the firm
ii)Â Â Â Â Â Â Â Â Â Â Â Â Thecost of equity capital, taking into account three models ofestimating cost of equity capital
iii)Â Â Â Â Â Â Â Â Â Â Â Theweight average cost of capital
