Pan American Airlines\' shares are currently trading 4 5% and the expected retur

Question

Pan American Airlines' shares are currently trading 4 5% and the expected return on the market is 10% The company's tar pays a combined federal and state tax rate of 35% What is the Model (CAPM)? at S 73 46 each The yield on Pan Am's debt is 6% and the firm's beta is 0 9 The T-Bill rate is get capital structure is 65% debt and 35% equity Pan American Arines estimated cost of common equity, employing the Capital Asset Pricing The estimated cost of common equity for Pan American Airlines % (Round to two decimal places

Explanation / Answer

Ans) Risk free rate(Rf) = 4.5%

        Expected return on the market(Rm) = 10%

        Beta(b) = 0.9

         Using CAPM

         Cost of common equity (Ke) = Rf + b*(Rm - Rf)

                                                   = 4.5% + 0.9*(10% - 4.5%)

   =9.45%

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