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Suppose that United Airlines (UAL) is successful in obtaining a government guarantee on its debt (covering $100,000,000). The current coupon rate on UAL debt is 8.5 percent and the bonds are priced to yield a return of 12 percent. Calculate the value of the guarantee assuming for simplicity that the bonds are a perpetual obligation and the government guarantee enables UAL to issue new perpetual debt at 6%. UAL estimates that its marginal tax rate is 32%.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92787331

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