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Pan American Airlines' shares are currently trading at $60.06 each. The yield on Pan Am's debt...

Pan American Airlines' shares are currently trading at $60.06 each. The yield on Pan Am's debt is 7% and the firm's beta is 1.5. The T-Bill rate is 5% and the expected return on the market is 9.5%. The company's target capital structure is 55% debt and 45% equity. Pan American Airlines pays a combined federal and state tax rate of 45%. What is the estimated cost of common equity, employing the Capital Asset Pricing Model (CAPM)?

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Answer #1

Cost of common equity=risk-free rate +Beta*(market rate- risk-free rate )

=5+1.5*(9.5-5)

which is equal to

=11.75%

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