Air Tampa has just been incorporated, and its board of directorsis grappling with the question of optimal capital structure. Thecompany plans to offer commuter air services between Tampa andsmaller surrounding cities. Jaxair has been around for a few years,and it has about the same basic business risk as Air Tampa wouldhave. Jaxair's market-determined beta is 1.7, and it has a currentmarket value debt ratio (total debt to total assets) of 40% and afederal-plus-state tax rate of 40%. Air Tampa expects to be onlymarginally profitable at start-up; hence its tax rate would only be30%. Air Tampa's owners expect that the total book and market valueof the firm's stock, if it uses zero debt, would be $11 million.Air Tampa's CFO believes that the MM and Hamada formulas for thevalue of a levered firm and the levered firm's cost of capitalshould be used because zero growth is expected. (These are given inequations V_L = V_U + V_{Tax shield} =V_U + TD, r_sL = r_sU +(r_sU - r_d)(1 - T)(D/S), and b =b_U[1 + (1 - T)(D/S)].)

1. Estimate the beta of an unlevered firm in the commuter airlinebusiness based on Jaxair's market-determined beta. (Hint:This is a levered beta; use Equation b = b_U[1 + (1 -T)(D/S)] and solve for b_U.) Do not round intermediatecalculations. Round your answer to three decimal places.
   
   
2. Now assume that r_d = r_RF = 8% and thatthe market risk premium RP_M = 7%. Find the required rateof return on equity for an unlevered commuter airline. Do not roundintermediate calculations. Round your answer to three decimalplaces.
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3. Air Tampa is considering three capital structures: (1) $3million debt, (2) $6 million debt, and (3) $9 million debt.Estimate Air Tampa's r_s for these debt levels. Do notround intermediate calculations. Round your answers to two decimalplaces.
   1. Air Tampa's r_s for $3 million debt: %
      
   2. Air Tampa's r_s for $6 million debt: %
      
   3. Air Tampa's r_s for $9 million debt: %
      
4. Calculate Air Tampa's r_s at $9 million debt whileassuming its federal-plus-state tax rate is now 40%.(Hint: The increase in the tax rate causes V_Uto drop to $9.428571 million.) Do not round intermediatecalculations. Round your answer to two decimal places.
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