Abbee Aviation(AV) has 40 million shares of stock outstanding, that trade at $40. The risk-free interest rate is 2% and the investment risk premium is 8.9%. This stock has a beta of 2.7. AV also has $400 million in 9% bonds outstanding and the company has 42% tax rate. Show all calculations for each of your answers.
Part 1. Calculate the firm's market capitalization and then calculate the enterprise value. Use the CAPM formula o determine the firm's cost of equity and calculate AV's weighted average cost of capital
Part 2. Assume the Abbee Aviation issues $200 million in bonds to buy back $200 million in common stock in order to recapitalize the firm. What is AV's new WACC? Finally, discuss why there is a change in WACC and explain the impact of the components of capital structure on a company's cost of capital
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