Air Tampa has just been incorporated, and its board of directors is grappling with the question...

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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 1.8, 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 $15 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 VL = VU + VTax shield = VU + TD, rsL = rsU + (rsU - rd)(1- T)(D/S), and b = bU[1 + (1 - T)(D/S)].)
Estimate the beta of an unlevered firm in the commuter airlinebusiness based on Jaxair's market-determined beta. (Hint: This is alevered beta; use Equation b = bU[1 + (1 - T)(D/S)] and solve forbU.) Do not round intermediate calculations. Round your answer tothree decimal places.
Now assume that rd = rRF = 9% and that the market risk premiumRPM = 4%. Find the required rate of return on equity for anunlevered commuter airline. Do not round intermediate calculations.Round your answer to three decimal places. %
Air Tampa is considering three capital structures: (1) $3million debt, (2) $6 million debt, and (3) $9 million debt.Estimate Air Tampa's rs for these debt levels. Do not roundintermediate calculations. Round your answers to two decimalplaces. Air Tampa's rs for $3 million debt: % Air Tampa's rs for $6million debt: % Air Tampa's rs for $9 million debt: %
Calculate Air Tampa's rs at $9 million debt while assuming itsfederal-plus-state tax rate is now 40%. (Hint: The increase in thetax rate causes VU to drop to $12.857143 million.) Do not roundintermediate calculations. Round your answer to two decimal places.%
Compare this with your corresponding answer to part c. Highertax rate the financial risk premium at a given market valuedebt/equity ratio.

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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 1.8, 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 $15 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 VL = VU + VTax shield = VU + TD, rsL = rsU + (rsU - rd)(1- T)(D/S), and b = bU[1 + (1 - T)(D/S)].)Estimate the beta of an unlevered firm in the commuter airlinebusiness based on Jaxair's market-determined beta. (Hint: This is alevered beta; use Equation b = bU[1 + (1 - T)(D/S)] and solve forbU.) Do not round intermediate calculations. Round your answer tothree decimal places.Now assume that rd = rRF = 9% and that the market risk premiumRPM = 4%. Find the required rate of return on equity for anunlevered commuter airline. Do not round intermediate calculations.Round your answer to three decimal places. %Air Tampa is considering three capital structures: (1) $3million debt, (2) $6 million debt, and (3) $9 million debt.Estimate Air Tampa's rs for these debt levels. Do not roundintermediate calculations. Round your answers to two decimalplaces. Air Tampa's rs for $3 million debt: % Air Tampa's rs for $6million debt: % Air Tampa's rs for $9 million debt: %Calculate Air Tampa's rs at $9 million debt while assuming itsfederal-plus-state tax rate is now 40%. (Hint: The increase in thetax rate causes VU to drop to $12.857143 million.) Do not roundintermediate calculations. Round your answer to two decimal places.%Compare this with your corresponding answer to part c. Highertax rate the financial risk premium at a given market valuedebt/equity ratio.