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Cost Of Capital For American Airlines

430 Words2 Pages

Value of Firm’s Operations and Weighted Average Cost of Capital for American Airlines

The value of a firm is considered as the total amount of the company’s equity and their debt value. It is the objective of all companies to boost its worth for the stockholders. The value of the firm can be calculated as the present value of the operating free cash flows over time. (“Value of a Firm”, 2017). The weighted average cost of capital is the rate of interest a firm must pay for the financing of their assets. It is also the least average rate of return that must be earned on its existing assets to please its stakeholders, its investors, and its lenders. (Jan, 2013). This portion of the week’s assignment will calculate both figures for the target …show more content…

The cost of equity = r_E= r_f+ β*(R_Mkt-r_f) and the cost of debt = r_D= (Interest expense )/((Short term debt+Long term debt)/2),.
E = 22.9 billion (Yahoo Finance, 2017)
D = 23.3 billion (Morningstar, 2017)
T_C = 38% or 0.38 (American Airlines Investor Relations, 2017) r_f= YTM = 0.91% (Yahoo Finance, 2017) r_E= r_f+ β*(R_Mkt-r_f) = 0.0091 + 1.41 (0.0611) = 0.095251 or 9.53% r_D= (Interest expense )/((Short term debt+Long term debt)/2)= (967,000 )/(88,494,000/2) = 2.19% β = 1.41 (Yahoo Finance, 2017)
Interest expense = 967,000 thousand (Yahoo Finance,

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