North South Airlines has been granted permission to fly passengers betweenmajor U.S. cities. The new company faces competition from four airlines thatoperate between the major cities. The betas of the equity of the four majorcompetitors (A, B, C, D) are 1.63, 1.79, 1.97, and 2.13; and the debt-to-equityratios of these four companies (in the same order: A, B, C, D) are 0.14, 0.30,0.49, and 0.66. Although these D/E ratios vary, all airline debt is rated the same.Suppose the yield on airline debt is 8.5%, the risk-free rate is 4.5% and theexpected market risk premium (the average difference between the marketreturn and the risk-free rate) is 7.5%. What is the (or discountrate) in percentage that you should use in valuing North South Airlines?
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