Pan American Airlines' shares are currently trading at $69.25 each.The yield on Pan Am's debt is 4% and the firm's beta is 0.7.The T-Bill rate is 4% and the expected return on the market (E (k_M))is 9%.The company's target capital structure is 25% debt and 75% equity.Pan American Airlines pays a combined federal and state tax rate of 35%.What is Pan Am's cost of debt (after tax)?

Question

Quizplus · Accepted Answer

The pre-tax cost of debt is the yield to maturity on the company's bonds, or 4%. After-tax cost of debt = k_d(1 - T) 0.04(1 - 0.35) = 2.6%

Pan American Airlines' Shares Are Currently Trading at $69