(Answered) Question you are trying the evaluate whether united

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Question: You are trying the evaluate whether United Airlines has any excess debt capacity. In 1995, UAL had 12.2 million shares outstanding at $ 210 per share, and debt outstanding of approximately $ 3 billion (book as well as market value). The debt had a rating of B, and carried a market interest rate of 10.12%. In addition, the firm had leases outstanding, with annual lease payments anticipated to by $ 150 million. The beta of the stock is 1.26, and the firm faces a tax rate of 35%. The treasury bond rate is 6.12%.

a. Estimate the current debt ratio for UAL.

b. Estimate the current cost of capital.

c. Based upon 1995 operating income, the optimal debt ratio is computed to be 30%, at which point the rating will be BBB, and the market interest rate is 8.12%.

d. Would the fact that 1995 operating income for airlines was depressed alter your analysis in any way? Explain why.

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