Author Question: Pan American Airlines' shares are currently trading at $69.25 each. The yield on Pan Am's debt is 4% ... (Read 132 times)

sheilaspns · **on:** Apr 25, 2021

Question 1

Katie's Boutique has zero-coupon bonds outstanding that mature in four years. The bonds have a face value of $1,000 and a current market price of $820. What is the company's pre-tax cost of debt?
◦ 5.01 percent
◦ 5.09 percent
◦ 5.18 percent
◦ 5.36 percent
◦ 5.49 percent

Question 2

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 (kM)) 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)?
◦ 2.6%
◦ 3.0%
◦ 3.3%
◦ 3.5%
◦ 4.0%

peilian · **Reply #1 on:** Apr 25, 2021

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